Plan Language Limiting Alternate Payee's Access to Benefits...

[Fielding Mellish]

Defined Contribution Plan. Plan language states that the benefit options available are a QJSA (if married), a lump sum, or partial benefits. If a Participant doesn't have contributions for 6 months, he can take a lump sum, even if not at retirement age (ignore the tax consequences for the sake of this scenario).

At issue is another provision. The Plan also has language that says that an Alternate Payee may make a voluntary cash-out in a lump sum so long as it has been 1 year since the divorce.

Now, a Participant can get his money in a lump sum after 6 months. The Alternate Payee has to wait a year.

Is that permissible?

Keep in mind that this language has been in the Plan since the early 2000s and the Plan has received 2 favorable determination letters since the language was inserted in the Plan. Now, I understand that the IRS doesn't really look at these Plans with a magnifying glass (well, some agents do), and I understand that, if the Plan language is improper then it needs to be changed.

Now, with all the talk lately about sham divorces, this would be a possibly effective way to combat that (though if people really wanted to skirt the rules, they'd do it anyway).

According to the DOL FAQ on QDROs:

The plan itself may contain provisions permitting alternate payees to receive separate interests awarded under a QDRO at an earlier time or under different circumstances than the participant could receive the benefit. For example, a plan may provide that alternate payees may elect to receive a lump sum payment of a separate interest at any time.

Now, that seems to say that the Plan can have provisions treating Alternate Payees and Participants differently by letting the Alternate Payee get her benefit sooner than a Participant or under different circumstances. Do you read it to say that a Plan can also impose greater limits on an Alternate Payee (under the "different circumstances" language)?

Also applicable here is the DOL publication on QDROs, specifically part 2-15

The plan administrator must act in accordance with the provisions of the QDRO as if it were a part of the plan. In particular, if, under a plan, a participant has the right to elect the form in which benefits will be paid, and the QDRO gives the alternate payee that right, the plan administrator must permit the alternate payee to exercise that right under the circumstances and in accordance with the terms that would apply to the participant, as if the alternate payee were the participant.

From that same publication, part 3-8

A plan may by its own terms provide alternate payees with additional types or forms of benefit, or options, not otherwise provided to participants, such as a lump-sum payment option, but the plan cannot prevent a QDRO from assigning to an alternate payee any type or form of benefit, or option, provided generally under the plan to the participant.

It seems to me that there are some hurdles to enforcing the Plan's language. Now, if I can get the parties to agree to insert in the QDRO that the Alternate Payee won't have access to her account for one year, then I think that's ok.

My bigger issue/question is the operation and language of the Plan.

Your thoughts? Thanks.

[QDROphile]

Don't read it as a limitation. In addition to the AP being able to take a distribution when the participant is eligible, the AP is also eligible for a distribution after the anniversary of the divorce, which strikes me as a pretty stupid provision because it involves the administrator in determining the date of divorce and that is a matter of state law and circumstances.

[Fielding Mellish]

Thanks QDROphile. The Plan's interpretation, though, is that the AP cannot get a cash out until after 1 year. I don't believe it's that the AP can choose benefits at eligibility, after 6 months, or after 1 year. It would be redundant to say that she could get a benefit at 6 months or a year.

So, in this case, the AP's segregated account is set up as of the date described in the QDRO. It seems to me that she cannot get a cash out until the 1 year anniversary of the divorce.

If the AP was a Participant, though, she'd be able to get her benefit after 6 months of no contributions.

That's where my sticking point is.

[QDROphile]

I think the plan's administrator's interpretation is of questionable legality. Generally, if the participant is eligible for a distribution, the AP will be eligible. The AP also has statutory eligibility based on "earliest retirement age." Plan terms can provide eligibility even when the participant is not.

[My 2 cents]

Remember - if a DRO has been provided to the plan and meets the requirements for qualification and is accepted by the plan administrator, the plan administrator MUST follow the terms of the QDRO.

There is no duty on the part of the plan administrator to be on the lookout for sham divorces. None. In fact, it may be a violation for the plan administrator to try to assert that a divorce is a sham and refuse to qualify the order or otherwise fail to go along with it.

The only way a plan could have a provision permitting an alternate payee to cash out one year after the divorce is if that is earlier than when the alternate payee would otherwise be able to cash his or her benefit out. If the participant can cash out as of any earlier date and the QDRO gives the alternate payee the right to be paid as of any date on which the participant could claim benefits, then that would prevail over the one-year provision.

[Fielding Mellish]

I understand and agree that an Administrator cannot refuse to honor a DRO just because the divorce may be a sham. But, if there's a way to put language in the Plan that can dissuade people from getting sham divorces, then that's a good thing, IMO. However, the Administrator honors DROs as presented, so the whole "sham divorce" thing is a non-issue here. I just threw that out there as a point of discussion.

In this case, the issue, which you guys have made good points on, is whether the Plan can limit when an AP gets her benefit.

Thanks.