May a plan preclude a before-retirement QDRO for a dependent but allow it for a spouse?

[Peter Gulia]

May an individual-account retirement plan provide that a QDRO distribution to an alternate payee is permitted before the participant's earliest retirement age IF the QDRO provides its distribution to the participant's spouse or former spouse, BUT also provide that a QDRO distribution before the participant's severance from employment or age 50 is NOT permitted if the distribution would be payable to the participant's dependent (including the participant's spouse or former spouse as a fiduciary for a dependent)?

[QDROphile]

First thought: What legitimate purpose or interest of the plan is served by such a policy?

Given my inability to come up with a legitimate purpose or interest of the plan, my second thought is that absence of any statutory or regulatory authority specifically on the subject suggests that the policy it not permissible. I would look at section 414(p)(3)(A) and wonder how the order could fail to qualify if the plan allowed pre-termination/age 50 distributions to spouse alternate payees.

Finally, I can imagine some illegitimate purposes that the policy would serve.

[Belgarath]

This is bizarre. Is this some attempt to refuse to pay child support or something? Anyway, I tend to agree with Qdrophile, although I have no real legal arguments to back my gut feeling. Seems like this gets into some pretty murky legal ground. First, since I doubt that any IRS prototype or VS document would permit this, I guess you'd have to submit for a d-letter. And IF the IRS approved it, the the Plan Administrator is bound by the terms of the plan.

Wouldn't want to mess with it myself! I hope to never have to consider this in real-life...

[david rigby]

Finally, I can imagine some illegitimate purposes that the policy would serve.

Like.

[K2retire]

Is the participant who wants to make this change trying to avoid having to pay the income tax that a child support QDRO would trigger?

[Peter Gulia]

Thank you all for your help.

When I was asked about this (and I haven't yet answered the inquirer), my initial reaction was similar to what Belgarath describes.

However, the inquirer (an employer that has the usual roles of sponsor and administrator) explained that the purpose is to get the set of QDRO provisions that results in the least plan-administration expenses.

Moreover, the inquirer explained that this matters because the plan (not the employer) pays the plan's expenses; there are unusual volumes of not only QDROs but also failed QDRO attempts; and it is impractical to allocate all of the QDRO-administration expenses to the accounts of the participants and alternate payees involved, resulting in some expenses being charged against all individual accounts (including participants who generate no QDRO activity).

While I worry that the provision doesn't seem even-handed, the inquirer's view is that ERISA section 206(d)(3)(E)(i)(I) {Internal Revenue Code section 414(p)(4)(B)} gives a plan settlor a choice between providing for a QDRO distribution before the participant's earliest retirement age or not so providing. And the inquirer doesn't see on the face of the statute anything that requires a plan settlor to make that choice the same way for all QDRO distributions.

If the only reason I can give for not writing the provision is my nose test, I can go with that. But it would be nice to have a little more detail.

Any further ideas from the BenefitsLink mavens?

[QDROphile]

While it is true that a plan can allow distributions to alternate payees before a participant is entitled to a distribution, the inquirer's interpretation of 414(p)(4) is incorrect.

The recent airline pilots scam divorce decision took the position that determination of qualification is a mechanical process. If an order satisfies qualification requirements, then it is qualified and its terms must be followed. As I posted before, I don't see how an order can be disqualified for providing that a non-spouse alternate payee is to be paid immediately if the plan has been designed to allow a spouse alternate payee to be paid immediately. What QDRO requirement does the order fail? If the plan does not provide for spouse alternate payees to be paid immediately, then such an order would fail under 414(p)(3)(A), and that would be consistent with 414(p)(4).

Without more detail and explanation, I see the cost rationale as smoke. Even if the rationale were facutally true, I don't think it matters for qualification. It may be an expense allocation issue, but qualification is another matter.

The pity here is that the economics of QDROs means that a proponent will be discouraged from fighting an incorrect plan position. The Department of Labor might get interested in the matter. 42 USC 666 evidences a strong federal policy for collection of child support and I suspect that most non-spouse QDROs relate to child support. I am not saying that 42 USC 666 (or the state statutes enacted under the mandate) is authority that a plan is compelled to pay before the participant is entittled to payment.

[ETA Consulting LLC]

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Benefitslink has become somewhat of an institution for our industry. I've enjoyed the reading the forums and tapping into the knowledge of experienced individuals; even to gain understanding of arguments that I don't agree with in order to be more fully informed of the actual argument. I think it is time, however, to modernize the forum, WITH THE ADDITION OF THE "LIKE" BUTTON

[Peter Gulia]

Again, thanks for helping me.

I told the inquirer no more reasoning than that I don't like the smell. The inquirer decided that it need not act as a fiduciary in doing the settlor act of deciding the plan's provisions. From my smell advice alone, the inquirer decided to provide QDRO distributions for ALL alternate payees without regard to the participant's severance or age. (So no worry about whether a dependent was deprived of something because of his or her lack of resources.)

But here's the employer's next question: Is there any reason why it cannot or should not amend the plan to get rid of all forms of distribution other than a single sum?

[QDROphile]

None, as long as the change complies with regulations under section 411(d)(6), including 1.411(d)(4). I assume that the employer does not want to have the plan serve as an estate planning vehicle and does not care that the plan might more efficient than an IRA for managing an individual's retirement investments. I would also apply lump sum distribution provisions to required distributions rather than allow distributions of only minimum amounts.

[mbozek]

I dont see why plan cannot allocate all QDRO expenses to participant/AP by charging a reasonable amount e.g., $500 $1,000 for cost of processing QDRO so that plan is made whole. There is no reason for plan pick up cost of discretionary action by participant to divide plan benefits by QDRO since participant and AP could negotiate division of marital assets without involving pension benefits.

[Guest EXTREMELYCONCERNED]

Has anyone ever thought that maybe acknowledging CHILD SUPPORT QDROS (before retirement) may interfere with the Plan's investment objectives? If you think about it, maybe there is a reason that Plans appear to discriminate against child support QDRO before pay-status. Child Support QDRO's are unpredictable - they could show up at any time and take large amounts from the "pool" of assets. Perhaps this is why the Plans try to ward them off until retirement. This way, the 'projections' stay in tact. Your family may suffer, but the 'projections' prevail and the Plan wins in 'appreciation.' Is it just me, or does it seem that UNEXPECTED withdrawals or PAYOUTS could TANK the Plans???!!!

[Mike Preston]

A QDRO can't pay outside the terms of the plan. If the plan allows lump sums and the participant quits, that is a plan design issue. Similarly, having QDRO's pay before earliest retirement age is allowable, but not required. I think it all boils down to plan design.