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Divorce - Account Frozen?


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I have a participant whose company was just purchased (asset sale). He is considered a new employee at the new company. As such he is eligible to take a distribution from the other plan. He called today to request distribution paperwork and let slip that he is going through a divorce. There is no domestic relations order yet. I believe they are at the very beginning (as in they just hired lawyers).

Isn't his 401k balance frozen until a DRO is received? Is there any IRS or DOL citation that says this? The plan doc just references QDRO's which we are no where near yet. His adviser is demanding something in writing.

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Absolutely not. It would be a breach of fiduciary duty to interfere with exercise of a participant's rights unless the plan has received a domestic relation order. However, check the plan's QDRO procedures. Some plans have adopted procedures that go beyond the requirements of law that must be taken into account. The DOL informal position on the subject is incorrect as a matter of law. Check the statute. The applicable court decision interprets it literally.

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We've been having an internal debate on this issue for some time. A company (a recordkeeper) that we acquired used a sample "QDRO policy" (universally adopted by their client plan sponsors) that provides that the plan fiduciaries (not the recordkeeper, thank God) would impose a 90 freeze on a participant account upon receipt of credible information that a situation exists which could lead to the issuance of a DRO. Now, many, many problems with this, including the determination of what is "credible" information, and the like, but it raises the fundamental question of the obligations of the plan/fiduciaries when presented with such information. Just for the record, the QDRO procedure was, in fact, blessed by an ERISA niche law firm whose name most would recognize....

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I've seen many situations in which a "sample" procedure that accompanies a service provider's prototype, volume-submitter, or similar documents is not the procedure the plan's administrator (the employer) would adopt if it had asked for advice.

But from my experiences, both as inside counsel and as outside counsel, in writing or editing suggested procedures, it's not easy to write a procedure that satisfies all audiences. And I've worked in situations in which a client's instructions were to do the least editing that would make a writing not obviously contrary to law, and to ignore everything else.

MoJo, just a curiosity for me, is it feasible to propose a revised QDRO procedure to the acquired customers? Or would doing so be a "big lift"?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Peter: It would be more than a big lift, but - we are in the process of determining best practices and processes for all concerned (acquirer and acquired books of business) going forward (taking the best of each to achieve (as near as possible) that "best practices" approach) and "QDRO services and processing" is being discussed. When final decisions are made, we will embark on a rollout to all existing customers of all necessary new documentation required (and QDROs are only a part of it).

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As a gentle reminder, IRC 414(p)(6)(B), states:

"(B) Plan to establish reasonable procedures
Each plan shall establish reasonable procedures to determine the qualified status of domestic relations orders and to administer distributions under such qualified orders."

(emphasis added)

In my observation, this rarely happens.

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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David: Clients may think they don't have a procedure, but in my experience, if a service provider provides ANYTHING other that purely directed "account splitting" services, a plan sponsor signed procedure is required. For the service provider I currently work for (and the two immediately preceding ones) a "required" QDRO procedure is provide and the signed version must be returned prior to any QDRO services being performed (and almost all clients use the QDRO services offered - which may include actual "Q"DRO determination services).

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