QDRO - investment earnings

[JKW]

I have received a QDRO for a plan participant where the spouse receives a flat dollar amount as of 12/31/14. Typically qdro's will have a section on earnings stating the alternate payee is eligible for earnings from 12/31/14 to date of segregation. This qdro does not address earnings during this period. Only stating that after the account is segregated the alternate payee is entitled to investment earnings. Any thoughts on how to handle the period from 12/31 to current date?

[ESOP Guy]

You can ask but the amount is clearly determinable and it isn't your job to 2nd guess the agreement.

I would ask the Plan Administrator is that is their understanding. If you want to be kind you could suggest they ask the participant if this was intended but there clearly is no requirement to give earnings from 12/31/2014 to time of split..

[JKW]

Thanks for your quick response.

[david rigby]

If you think the order is qualified (and have documented so), just process as is, ASAP.

- You are not responsible for poorly drafted (or "unfair") DRO's.

- If you give anyone a "heads up" notice, then you may have created a similar responsibility for yourself in the future.

[GMK]

^Amen!

[QDROphile]

The plan adminsistrator is responsible for interpreting and the plan's QDRO Procedures should address the circumstances, but they won't. Asking what was intended is asking for trouble. There is nothing wrong with strictly follwing the terms of the order and distributing the amount specified. After the 2008, we saw plenty of QDROs that were quite clear that they did not want earnings adjustments. They were avoiding the real possibility of losses.

[Mike Preston]

Of course, I wouldn't put up much of a fight, if any, if such a DRO were rejected in the first place. A DRO can't order a plan to pay a benefit to an alternate payee that, in effect, requires an increased benefit not otherwise payable from the plan. What if there is another 2008-type year and the plan finds that the total balance of the participant is less than the "flat dollar amount"?

[QDROphile]

IRC 414(p) (3)(B)

[Mike Preston]

And what is the practical effect of having approved a DRO as a QDRO that calls for $X to be paid to the alternate payee only to find that the participant is only entitled to $Y where Y is less than X? Just give it all to the AP? Reject the previously approved QDRO as no longer qualified? Other?

[jpod]

If the QDRO has the often-used boilerplate language to the effect that "nothing in this Order shall require the Plan to pay . . . [more than the Participant's vested interest in his/her account] . . . ," I believe that should address MPreston's concerns.

[QDROphile]

Another approach is to require that a fixed payment award be distributed immediately. The available balance is known at the time of qualification and the AP's amount is segregated and liquidated for distribution. If the balance is insufficient, the order is not qualified.

This approach is necessary when dealing with the FIdelitys of the world, plus you have to invest the liquidated amount in a money market fund and ultimately distribute the wrong amount to the AP (at least it is wrong by excess, and not by much). Thanks again, Fidelity.

[Mike Preston]

On day of liquidation I'd be tempted to limit amount to AP as required by the DRO and send the rest ($0.42?) back to the participant's account.

EDIT: The DRO did, in fact, provide for the 42 cents to be paid to the AP.

[mbozek]

There are only two possible options.

1. Follow the literal unambiguous language of the DRO which I am assuming was drafted by counsel for at least one party and the signed by the court and distribute the amount prescribed in the DRO plus earnings after segregation. I don't see any liability issue for the plan administrator in following this option if for no other reason than any liability would be due to malpractice of the attorney who prepared the DRO.

2. Contact the attorney who submitted the DRO and confirm that the terms do not include interest earned in 2015 prior to the date of segregation. My opinion, for what it is worth, is that the only time that the plan rep should request clarification of the terms of a DRO is where there is an ambiguity or a DRO provision cannot be complied with under the plan, e.g., the parties want earnings in the investments divided for 10 years prior to the date of the divorce.

Since it is plausible to assume in the regular course of plan administration that the parties decided not to include interest in return for no adjustment of earnings there is no need to question the election chosen by the parties and approved by the court.