QDRO Acceleration vs. Nonassignability

[dv13]

§1.409A-3(j)(4) allows for the acceleration of Plan payment to the extent necessary to comply with a domestic relations order. Let's say the document contains this acceleration provision but also contains the nonassignability provision below -- do you see a conflict? Or am I correct in thinking that the distinction lies between one provision referring to payment and the other provision referring to assignment? Your thoughts, please. Thank you.

Nonassignability. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage, or otherwise encumber, transfer, hypothecate, alienate, or convey in advance of actual receipt, the amounts, if any, payable hereunder, or any part hereof, which are, and all rights to, expressly declared to be unassignable and non-transferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure, attachment, garnishment, or sequestration for the payment of any debts, judgments, alimony, or separate maintenance owed by a Participant or any other person, be transferable by operation of law in the event of a Participant’s or any other person’s bankruptcy or insolvency, or be transferable to a spouse as a result of a property settlement or otherwise. If a Participant, Beneficiary, or successor in interest is adjudicated bankrupt or purports to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber transfer, hypothecate, alienate, or convey in advance of actual receipt, the amount, if any, payable hereunder, or any part thereof, the Plan Administrator, in its discretion, may cancel such distribution or payment (or any part thereof) to or for the benefit of such Participant, Beneficiary, or successor in interest in such manner as the Plan Administrator shall direct.

[QDROphile]

"Let's say the document contains this acceleration provision but also contains the nonassignability provision below ***" "Your thoughts, please."

I think one must be able to look at all the relevant provisions before one can interpret.

[dv13]

Respectfully disagree. I merely want to know thoughts on whether these two provisions conflict with one another if in the same document. Thanks.

[QDROphile]

OK, I will play along. If the following is the other provision in the plan, then it does not conflict; it is the same as saying that the sky is blue. It has nothing to do with the plan.

§1.409A-3(j)(4) allows for the acceleration of Plan payment to the extent necessary to comply with a domestic relations order

[dv13]

This is the actual provision in the Plan. Does your answer change?

Permissible Acceleration Events. Except as specifically permitted herein or in other sections of this Plan, no acceleration of the time or schedule of any payment may be made hereunder. Notwithstanding the foregoing, the Plan Administrator, in its sole discretion (without any direct or indirect election on the part of any Participant), may accelerate payment of all or a portion of a Participant’s vested Account Balance in accordance with the provisions of Treasury Regulations §1.409A-3(j)(4) and any subsequent guidance issued by the United States Treasury Department. Accordingly, payments may be accelerated, in the following circumstances:
(a) Domestic Relations Orders. The Plan Administrator may accelerate payment of a Participant's vested Account Balance to the extent necessary to comply with a domestic relations order (as defined in Section 414(p)(1)(B) of the Code).

[QDROphile]

First thought (revised): The drafting is incompetent unless it was intended to create ambiguity. Ambiguity is generally not desirable and the acceleration provision was not necessary in the plan to provide ability to accelarate if the plan adminstrator felt that the law compelled assignment despite the anti-assignment provision. Futhermore, I disfavor such an anti-assignement provisions as applied to domestic relations orders for various reasons, including that I am unsure if the provision can hold up against a judicial order to assign pursuant to a domestic relations order. Therfore, I conclude that the drafting is incompetent unless it was ordered against the advice of the drafter, who made good arguments why the both of the provisons should not be included in the forms that ultimately appeared in the plan.

Interpretation: I think the plan administrator can interpret the provisions either way, especially if other plan terms (not revealed) give the plan administrator the express authority to interpret. (1) The PA can give effect to the anti-assignment provision and interpret the acceleration provision to apply only in the event that it is ultimately determined by appropriate legal proceedings that assignment pursuant to a domestic relations order must be given effect despite the anti-assignment provision . The PA would reject a domestic relations order based on the anti-assignement provision, and continue resistance until after losing a long, drawn out legal battle (see "to the extent necessary to comply"). (2) The PA could instead give effect to a domestic relations order by interpreting "to the extent necessary to comply" as not requiring resistance to test the enforceabilty of the order. I would be somewhat skeptical of (1) because if (1) was truly intended, the acceleration provison concerning DROs is legally not necessary to allow the beaten-up PA to concede to legal compulsion and pay accoding to the terms of a DRO. That lends credibility to (2) because if the acceleration provision is not necessary if the anti-assignment provision loses, the explation for having the provision in the plan is that it overrides the anti-assignement provision when the PA decides it is prefereable not to test the uncertain or prevailing law on the effectiveness of the DRO despite the annti-assignment provision. There is also a middle ground. The PA can reject attempted DROs. If the proponent goes away quietly, hurray for the anti-assignment provision (which I still think is not the better choice for policy reasons). If the proponent pushes, the PA can decide to give up easily rather than waste time and money defending the anti-assignment provision based on the PA's assessment at the time of the prospects for cost and success of resistance.

[Mike Preston]

Though not an attorney, I don't think the draftiing is incompetent. It merely parrots the regulation granting a permissability of certain payments.

I know many an ERISA attorney that argue vociferously for ambiguity, thereby leaving the decision to the Plan Administrator when possible. This is why individually designed plans are so much shorter than pre-approved plans. Sure, some things in the plan must be unambiguous, but if something can be left to a later day (and an Administrative Policy) many would prefer that course.

In the case above it seems clear to me that neither (1) nor "middle ground" is defensible in a transparent environment. Admittedly, communications between Plan Sponsor and ERISA counsel are not intended to be transparent, but if they were transparent the only interpretation I can see is a literal one, applied based on an Administrative Policy, which is a slight modification of (2).

The non-assignability clause is clearly trumped by the Permissable Acceleration Events clause. But the PAE clause merely allows acceleration and does not force it. Therefore the Plan Administrator might develop a document which identifies when it will and when it will not comply, thereby defining an Administrative Policy for this purpose.

I note that the regulations do not even require the PAE clause be included in the document for the Plan Administrator to invoke it. The only requirement is that the Plan Sponsor not have discretion with respect to whether or not to honor an individual DRO.

The only way I can resolve the tensions created by these rules is by the adoption of an Administrative Policy which binds the Plan Sponsor as if the language were included in the plan; changable at will.

Note that the regulations allow the acceleration clauses, even if included in a plan, to be removed without invoking the change in the time and form of payment rules of 1.409A-2(b).

[dv13]

I appreciate your comments. My office has had a lively internal discussion on both of these Plan provisions and whether or not to remove one of them, revise both of them, etc. Your comments will help us choose which path to take. Have a great week!

[QDROphile]

I can appreciate that an ERISA lawyer might want to have a vague provision, but it will be difficult to persuade me to accept an ambiguous provision.

Parroting a regulation about permissibility of payments, especially because it it not necessary to include such a statement in the plan document for purposes of section 409A in the event something compels the payment contrary to the plan terms, is incompetent if the employer does not wish to permit the payment. Including a provision that precludes the payment, including express preclusion of attempts that encompass most domestic relations orders, is incompetent if the employer does not intend to resist division of interests under domestic relations orders.