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A Plan Administrator of a 401kPSP received a phone call from a former participant who has a large balance ($100k) that he wants to take a distribution (which he is otherwise eligible to receive) so he doesn't lose his home, and, that he and his wife are splitting and she wants half of his Plan account.

The Plan's QDRO Procedure states,
"Procedure prior to receipt of order: The Plan will apply the following procedure prior to the Plan's receipt of a Domestic Relations Order.

  1. Suspension of Participant distributions or loans. If the Plan Administrator is on notice (verbal or written) regarding a pending domestic relations action (e.g., a divorce) and has a reasonable belief the Participant's account may become subject to a QDRO, the Plan Administrator may suspend processing the Participant's distribution or loan requests pending resolution.
  2. Removing hold on the account. After placing a hold on the account, the Plan Administrator should notify the Participant of the hold on the account. In order to remove the hold, the Plan Administrator should request the Participant to provide written confirmation that a court will not issue a QDRO with respect to the account, such as a property settement agreement awarding the entire account to the Participant."

Questions:

  1. Is such a phone call sufficient to place the Plan Administrator "on notice" of a pending domestic relations action, such that a "hold" should be placed on the Participant's account, for which he is otherwise eligible to receive a distribution?
  2. Can the Plan process (at least) a partial distribution or a hardship distribution in amount necessary for the hardship (house) up to an amount equal to no more than 50% of the account, essentially only "holding" 50% of the account pending the purported domestic relations action?
  3. If a "hold" is appropriate at this time on the Participant'saccount (full or partial), for how long should it remain on "hold" before the Plan releases it for inaction by either party?
  4. What if the Participant does not ascertain a court order but he (and his wife if necessary?) does contact the Plan Administrator and say they were arguing and the phone call made today was without merit and should be ignored? Or would something more concrete be preferred such as a sworn affidavit? Could the Plan Administrator remove the "hold" on the account?

Thank you.

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1) The procedure indicates that a verbal notification is sufficient. Telephone calls are "verbal."

2) I don't think any distribution is appropriate. No one know what percentage of the balance the DRO will ultimately award to the alternate payee. It may be more than half. Indeed, it could be all of the account (and he gets the house or other assets). Too many unknowns to make assumptions.

3) The procedure indicates a method for removing the hold. It needs to be written (and IMHO should be a "warranty" on the part of the participant that no DRO is forthcoming - so that there may be recourse if in fact a DRO is later issued.) I'm not enamored by "participant" statements as justification for a release of the hold. Participants lie - especially when trying to grab or hide assets from a soon to be ex. Not sure what the plan requires - but ....

4) I'd still get the "written" document required by the procedure - and if the spouse signs it - so much the better (and notarized is even better to prove that it was the spouse).

Finally, ask counsel. The plan or it's fiduciaries - or the sponsor - don't want to end up paying "twice."

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Is the potential suspension indefinite? Is that reasonable?

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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So if the plan acts on the verbal by effecting a hold, then the participant now has the unenviable task of proving the negative if there is no imminent action. What if they reconcile or otherwise have no need for legal action such as a property settlement or court order?

If the plan accepts a verbal as "notice" and asserts that they have a "reasonable belief," then they are subjecting themselves to litigation, especially if the participant can assert that they never made the call or conveyed such message that division of property is taking place.

Before a hold is effected, I would ask (in writing) for confirmation that there is a impending division of property. It's the participant's money, not the plans. The burden should be on the plan to validate a need for withholding the participant's own money.

In short - Accept No Verbal Orders

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So if the plan acts on the verbal by effecting a hold, then the participant now has the unenviable task of proving the negative if there is no imminent action. What if they reconcile or otherwise have no need for legal action such as a property settlement or court order?

If the plan accepts a verbal as "notice" and asserts that they have a "reasonable belief," then they are subjecting themselves to litigation, especially if the participant can assert that they never made the call or conveyed such message that division of property is taking place.

Before a hold is effected, I would ask (in writing) for confirmation that there is a impending division of property. It's the participant's money, not the plans. The burden should be on the plan to validate a need for withholding the participant's own money.

In short - Accept No Verbal Orders

Yea, well, maybe if they hadn't ALREADY adopted a procedure that specifies a verbal notice is sufficient, then they'd have the luxury of not accepting them - but I'd take the case of hte potentially soon to be ex-spouse/alternate payee on the facts given by the OP.

Bad planning provides bad options and even worse outcomes.

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Thank you and this is exactly my concern - the way this could be interpreted.

The QDRO Procedure says the Plan Administrator "may" place a hold... It is not a definitive "will" or "must" and it seems to me this is because there needs to be solid basis for such a hold and it should be done carefully.

Since this matter has never occurred before for this Plan, the PA is establishing a precedent on how it interprets and handles this I would assume.

Is it not reasonable to interpret the QDRO Procedure to mean that a verbal notification of this nature would require more substantial basis, for example receiving a telephone call from an attorney placing the Plan on notice, indicating a DRO is being drafted or sent or discussed by the opposing parties...?

If the PA acts prematurely the concern is an unintended violation of a Participant's right to distribution and how long will this account be on hold for a Participant who absent any legal action is eligible to request distribution of his account, and who has told the PA his house is at risk?

CADMT you suggested, "Before a hold is effected, I would ask (in writing) for confirmation that there is a impending division of property. It's the participant's money, not the plans. The burden should be on the plan to validate a need for withholding the participant's own money." I think this would clarify what was otherwise a telephone call that may have been made in a desperate moment perhaps infused with histrionics (that as was mentioned, could be denied...) and permit the participant to state for the record of the Plan whether or not a property settlement / divorce is in the works. Would it be best to get both the Participant and the Spouse to swear statements indicating marital bliss?

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While I defer to the ERISA attorneys, I'd just observe that it is the participant who wants the distribution that is saying there will be a divorce - what ulterior motive would a participant have for making a statement that serves to delay or prohibit a distribution to himself? So I think it is pretty reasonable for the plan to put a hold on the account based on that, pending whatever additional written confirmation/statements whatever an attorney would tell the plan is appropriate.

I think the "may" is fairly standard language, to allow some Plan Administrator flexibility.

And, good luck getting a statement indicating marital bliss. :D

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Thank you Belgarath. That is a very good point.

Given the informality of the telephone call, would a formal sworn statement by the Participant (and the spouse) suffice if both indicate there is no intent of divorce or splitting of property and will therefore hold the plan harmless should either arise following a distribution of the account to the participant, accepting any consequences personally should either arise...?

And, good luck getting a statement indicating marital bliss. :D

:rolleyes::lol::lol::lol:

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