403(b) QDROs

[IRA]

Are non-ERISA 403(b) plans (e.g., governmental 403(b) plans) required to have QDRO policies? I believe they do because the 403(b) regs say "under section 414(p)," which I take to incorporate all of the 414(p) requirements.

Assume state law is silent on the issue.

[Carol V. Calhoun]

I don't believe that governmental 403(b) plans are required to, but I always advise that they do as a matter of self-preservation.

Section 414(p) does not by its terms require anything. Instead, it is an exception to section 401(a)(13), which otherwise precludes assignment and alienation of benefits. Section 401(a)(13) is not applicable to governmental plans, due to the last sentence of section 401(a) (following 401(a)(37)). Thus, section 414(p), as applied to governmental plans, neither requires a governmental plan to abide by a QDRO nor prevents it from complying with a domestic relations order that is not a QDRO.

The only part of section 414(p) applicable to governmental plans is section 414(p)(11), which states that if a governmental plan complies with a domestic relations order (whether or not it is a QDRO), the distribution of benefits will be taxed as though it had been made pursuant to a QDRO.

The complicating factor is that ERISA does not preempt state law as applied to governmental plans. Thus, if an order is issued pursuant to state domestic relations law, even if it would not qualify as a QDRO, the plan has no defense against complying with it, unless it can show that its own plan terms are also a matter of state law, and preclude compliance. It can often be difficult to determine whether the terms of a governmental plan are part of state law, if they are not actually embodied in a state statute. However, our experience is that if the plan terms impose requirements on domestic relations orders comparable to those that would be required for a QDRO in the case of a private plan, domestic relations judges and parties to domestic relations matters are inclined to comply with them. If the plan contains no references to domestic relations orders, it can be much more difficult to avoid the issuance of a domestic relations order that could be difficult for a plan to interpret or comply with.

[GMK]

but I always advise that they do as a matter of self-preservation.

Good advice ... for a lot of reasons.

[IRA]

"Section 414(p) does not by its terms require anything."

Section 414(p)(6)(B) does by its terms require a plan to establish QDRO procedures. The 403(b) regulations say that a 403(b) plan does not violate the 403(b) distribution restrictions "merely as a result of a distribution made pursuant to a qualified domestic relations order under section 414(p)." This suggests that the 403(b) regulations incorporate all of section 414(p), including the requirement to adopt the QDRO procedures. The issue is not 401(a)(13); the issue is the distribution restrictions under 403(b). Thus, although 414(p) does not apply to governmental plans, it seems to apply to all 403(b) plans. Is there any guidance that indicates otherwise? This has now become academic however because the client has gone from "do we need it" to agreeing that they "should have it 'as a matter of self-preservation.'" As GMK pointed out that is good advice you gave.

[mbozek]

QDRO procedure is not necessary/desireable to achieve a non taxable transfer of non ERISA 403b benefits pursuant to a divorce.

Under IRC 1041(a) annuity benefits can be transferred tax free to a former spouse if the transfer is incident to a divorce which includes a separation instrument.

Under reg. 1.1041-1T(a) q/a-4 transfers of property includes all property whether real or personal, tangible or intangible. Transfers of services are not permitted under IRC 1041.

Simplest way to transfer 403b benefits is to include the transfer in property settlement. See regs 1.1041-1T(b) q/a-7. No reason to waste money and time on preparing a DRO. Transfer can occur up to 6 years after the date marriage ceases.

[jpod]

MBozek, I don't disagree with you, but I suspect many 403(b) annuity issuers/custodians would. I wouldn't want to tell a client that handling as part of the property settlement pursuant to the Section 1041 construct would be "simpler" unless I knew in advance that the issuer/custodian was going to play ball.

[mbozek]

MBozek, I don't disagree with you, but I suspect many 403(b) annuity issuers/custodians would. I wouldn't want to tell a client that handling as part of the property settlement pursuant to the Section 1041 construct would be "simpler" unless I knew in advance that the issuer/custodian was going to play ball.

I recollect that the 1041 procedure was the way TIAA-CREF divided up the 403b contracts of public employees. They had forms drafted to make it easy. Don't know why a custodian would have a problem since 1041 meets the requirements for a tax free transfer and only applies to non ERISA plans which are exempt from the QDRO requirements. As it is the parties will use IRC 1041 to transfer all non pension assets without incurring taxation. What's the risk to the custodian if the parties attorneys agree to a 1041 transfer?

[jpod]

Not all custodians have the same level of sophistication or risk appetite. They also have to be convinced that 414(p)(11) is merely an alternative to 1041 insofar as tax treatment (and associated 1099-R reporting) is concerned.

[mbozek]

Not all custodians have the same level of sophistication or risk appetite. They also have to be convinced that 414(p)(11) is merely an alternative to 1041 insofar as tax treatment (and associated 1099-R reporting) is concerned.

Its a no brainer to anyone with the intellectual capacity to read the IRC/ERISA because

1. Since QDRO procedures do not apply to govt 403b plans, public plans do not need to follow QDRO procedures to transfer benefits tax free, and

2. IRC 1041 allows tax free transfers of all tangible and intangible personal property which includes 403b annuities.

ERISA plans must follow the QDRO rules because QDROs are the only way to transfer assets of an ERISA plan on a tax free basis between spouses under a divorce decree without violating the ERISA non alienation rules. Also ERISA plans must conform to QDRO provisions because ERISA preempts application of state divorce law to divide benefits unless the court order conforms to QDRO provisions. Public plans are not subject to any of these rules.