Tips on Fixing a Mistaken QDRO?

[smit1970]

401(k) Plan received a divorce decree and separation agreement in March 2014, directing the parties to split the participant's account in the Plan (say $12,000). Participant was to retain responsibility for a loan on the account (say $4,000), so that Alternate Payee should have received $6,000, and Participant $2,000 plus what he repays on his loan.

Plan sponsor didn't request a separate QDRO, nor did the parties provide one, and sponsor acted on the general instructions in the settlement agreement. Arguably the settlement agreement wouldn't have qualified as a QDRO, but they didn't realize that and administered it as if it was. However, they then erroneously segregated the account. Instead of paying the AE $6,000, they paid her $4,000 because they thought the parties were sharing responsibility for the loan (i.e., they divided the $8,000 balance after the loan was deducted).

AE has now realized she was underpaid, and wants the Plan to pay her the remaining $2,000. Participant's account has enough to cover this amount. Any thoughts on how to correct? Would her amount need to be adjusted for interest? The settlement agreement was silent on interest, and no separate QDRO policy exists.

[david rigby]

Perhaps the PA might consider reversing everything and starting over, especially with a real QDRO?

[MoJo]

First, did the "materials" they receive taken together and as a whole comply with the requirements for a QDRO? Not pretty, but I've seen some that do (although I don't recommend it). If the decree of divorce gives effect (as an order of a state court of competent jurisdiction - which it appears to be) and hte Separation Agreement contains sufficient language to meet the requirements - it arguably could be considered a QDRO. I see nothing in the QDRO "rules" that require it to be a separate, stand alone document - but as a practitioner who sometimes reviews QDROs, I really don't care to have to weed through provisions on who gets Scruffy the dog and the Weber barbecue....

Second, I would simply treat the alternate payee as a participant (because they are) who was short changed on a distribution - and needs to be made whole. That would include an earnings adjustment, as may be appropriate.

[smit1970]

Thanks David. The PA knows the parties, and they are concerned about an action being brought by the AE for improperly accepting and administering the order. They don't want to suggest going back for a proper QDRO. I'm working with them on the QDRO procedures and training, but if I can make an argument that the settlement agreement could have qualified, how do you feel about just making it right at this stage? Would we need a second order this far down the line?

[smit1970]

The biggest issue with the settlement agreement is that it doesn't contain a segregation date. The Sponsor took the date of the divorce order as the segregation date. Otherwise it's not pretty, but we could argue that it suffices.

[MoJo]

but we could argue that it suffices....

Based on your prior post (that they don't want to go back for a separate qdro), it looks like there is no choice.

As always, I'd recommend "documenting" that it was determined to be a QDRO (as difficult as that may be) to demonstrate that the plan operated appropriately (except for the shorting of the distribution - which is rectifiable).

[smit1970]

Agreed MoJo. Thoughts on steps to rectify shorting the distribution?

[GMK]

How about:

Step 1: pull $2000 out of the Participant's account

Step 2: distribute the $2000 to the Alternate Payee or the AP's rollover receiving account as you did the first $4000

[CADMT]

Who sent the settlement agreement to the plan? Never send an SA to the plan!

[QDROphile]

I support sticking with the interpretation of the domestic relations orders received as a QDRO. The plan is already deep into that position. The efforts should now be directed at administering the QDRO in accordance with its terms, whatever the plan administrator interpreted them to be. If the AP was shorted $2000, then fix it. Following documentation formalities as much as possible in the process would be both good training and good for defense.

[smit1970]

The AP sent the settlement agreement to the Plan. Thanks all for your responses.