Limiting Forms of Benefit

[jpod]

I am looking at a DB plan with a very recent favorable DL that by its terms limits an alternate payee's distribution options under a separate share QDRO to less than what's available to a participant (e.g., can't elect any of the joint and survivor options available to participants).  Putting aside the fact that there is a favorable DL, is that permissible?  I thought the statute, or at least the DOL's interpretation of the statute, provides that a QDRO can give the AP the same distribution options available to the participant (except entitlement to statutory QJSA rights).    

[CuseFan]

What you can't do is allow a form that is not permitted by the plan. In this case, if you allow the A/P to select any joint and survivor option, you are now paying a total benefit from the plan that is based on three life expectancies rather than two - the participant, the A/P and the A/P's contingent annuitant. I have not seen any plan permit this. All DB QDROs I have seen prohibit the A/P from any J&S option. 

On another front, you seem to be confusing the plan document provisions - the subject of the favorable DL - with the QDRO's provisions, which is a separate document for the specific purpose of dividing marital pension benefits and is mutually exclusive from the DL. I don't think the QDRO must provide for all the plan's options (other than J&S) but I'm not sure. I have not seen a plan with language that prohibits certain payment forms related to QDROs, usually the reference is to timing. 

[jpod]

Cuse, I'm not confusing anything, but you're confusing me.  The issue is this:  If the plan gives the participant an array of distribution options, can the plan be written to take those away from an AP?  I say "no." 

[CuseFan]

Sorry, I misunderstood - so the plan's terms limit any A/P's benefit options. If it's only the J&S options then absolutely, because, as I said, the plan shouldn't permit ultimately paying out on three life expectancies (and every DB QDRO I've seen prohibits that anyway). If it limits options further - like saying the A/P has to take a lump sum - then I would tend to agree that might be an issue. 

[jpod]

Might?  What in the law creates a doubt?

[My 2 cents]

If the plan does not allow joint forms except with respect to a spouse, then the QDRO should not allow a joint option.  If it allows a participant to choose a joint form with a non-spouse joint annuitant, it should allow the alternate payee to elect a joint form as well, otherwise not.

This would not be a form contingent on three lives (assuming that the QDRO awards the alternate payee his or her benefits on a separate property basis).  If it is separate property, it is no longer is contingent on the participant's life, just that of the alternate payee (and, if relevant, the life of the alternate payee's joint annuitant).

[jpod]

Thank you My 2 cents.  Yes, the QDRO would be a separate share award.  The plan allows the participant to elect J&S options with non-spouse beneficiaries, and a few different certain and continuous life annuity options.  The plan says that an AP can get only a single life annuity.  I think this is just wrong, and I am concerned that maybe the Plan should ignore those limitations and just follow the law, and not rely on the favorable DL.  

[My 2 cents]

Reminder:  Just because the IRS says a plan is OK does not mean that individuals cannot litigate a point.  The IRS does not have the authority to wipe out ERISA rights.  Favorable DLs are well and good, but probably ought not be admissible as a defense against a litigated claim.

[Peter Gulia]

Consider ERISA § 404(a)(1)(D):  “[A] fiduciary shall discharge his duties . . . in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this title {I} and title IV.”

 

[Larry Starr]

I really would want to see the limiting language in the plan document that you are talking about; all too often what we are told the plan says is not really what it says, so I am cautious about commenting without seeing the language.  I can say I have never seen DB language that has specific forms of payment that are only applicable to an alternate payee (except for the statutory modification noted below).  Is it legal?  Well, I suppose if it's non-discriminatory under the benefits, rights and features provision, then it would be ok.  I would certainly never consider  putting it in my plans; why bother?  What's the reason?

Here is the typical language included in my separate interest QDROs and a comment about that:

“Actuarial Equivalent” means any form of benefit available under the plan (such as a Single Life Annuity for the life of the Alternate Payee) that differs in duration or manner of payment from another form of benefit available under the plan (such as an annuity with a different starting date for the life of the Participant or a Qualified Joint and Survivor Annuity), but which is actuarially equivalent to the other form of benefit when calculated using the actuarial assumptions and factors used by the plan itself.
    COMMENT: There is one form of benefit an Alternate Payee cannot be awarded in a QDRO, and that is “a Joint and Survivor Annuity with respect to the Alternate Payee and his or her subsequent spouse,” 29 U.S.C. Section 1056(d)(3)(E)(i)(III). Any other form of annuity offered by the plan to Participants may be chosen by an Alternate Payee.
 

[jpod]

It is an IDP, not a prototype of volume submitter.  You'll just have to take my word for it.  I don't know why it was written that way, but it was, and it got by the IRS upon review of the DL (perhaps even for multiple cycles, and perhaps even before the 5-year cycle program too).  The question is whether the language in 414(p) and the equivalent Title I provision that says that the QDRO can't require a form of benefit not otherwise allowed under the plan imply that you can't narrow the forms of benefit available to APs, or does the "otherwise allowed" language refer to forms of benefit otherwise allowed FOR APs without regard to the forms of benefit allowed for participants?  

[Peter Gulia]

This seems to be a question about whether the written plan states a provision that is inconsistent with ERISA 206(d)(3)(E)(i)(III).

If so, does the plan grant its administrator discretion to decide?

How strong is the plan's language about deference to the administrator's discretion.

Might the deference not matter because a dispute would play out in a circuit that doesn't recognize deference for something that goes beyond a pure claims decision to involve an application of ERISA's part 4?

Is there enough at stake that the administrator might consider applying to a Federal court for instructions?

 

 

 

[jpod]

FDC:  All good thoughts, but way over-the-top for my situation.  All I want to know is what Benefits Link mavens think about the underlying legal issue:  Can a plan narrow the forms of benefit available to an AP as compared to those available to a participant?  

[RTK]

My vote is that the Plan would have to accept a QDRO allowing the AP to elect a form of payment available to the Participant (other than a spouse J&S).  This is based on ERISA 206(d)(3)(E)(i)(III) noted above.  Also, I would argue that the "otherwise provided" language in ERISA 206(d)(3)(D) refers to the forms of payment available to the Participant whose benefit is being assigned, and would not provide a grounds for rejection.  Depending upon your jurisdiction, the Plan could end arguing this issue in the state court.

[Peter Gulia]

jpod, if you're looking to support the mainstream view you described, it is the last sentence on page 39 of EBSA's QDRO booklet, and EBSA's citations to support Q 3-8 are on page 40.

https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/publications/qdros.pdf

Even if that view is wrong, I doubt the Internal Revenue Service would tax-disqualify a plan because the plan's administrator decided it must honor a QDRO that directs a distribution form that is not provided by the written plan but is, under the administrator's good-faith interpretation, required under ERISA 206(d)(3)(e)(i)(III).

[Luke Bailey]

I'd want to research this before advising a client, but I do not see why a plan could not limit the forms of benefit available to an AP to a smaller set than is available to participants. After all, I can do the same thing with respect to different groups of participants, e.g. provide that group A gets a QJSA and 10-year certain and life, and group B only the QJSA. There are limits of course on changing the forms of payment available for benefits already accrued, and of course having different benefit forms available for different groups is subject to a nondiscrimination analysis under the 1.401(a)(4)-4 "benefits, rights, and features" reg, but I can limit benefit forms for different groups of participants. I don't see anything in 414(p) that requires me to make available to an AP all the forms of benefit available to the participant.

[Peter Gulia]

Luke Bailey, if a plan provides different distribution forms for different classes of participants, do you think the distribution forms available to an alternate payee must be based on those available to the participant from whom the alternate payee derives a right to an assignment or alienation of the participant's benefit?

Or do you think ERISA permits a plan to treat alternate payees as a class of participants?

 

[QDRO Group]

I agree with those who say that, generally, ERISA section 206(d)(3)(E)(i)(III) requires a plan to permit an AP to elect any form of benefit that the P could elect, except for a J&S with a subsequent spouse.  I'll leave for another discussion whether that section actually prohibits a plan from permitting an AP to elect a J&S with a subsequent spouse.

The plan here may have excluded all J&S options for APs to comply with the required minimum distribution regulations, which are very complicated (especially as applied to an AP).  The RMD rules generally prohibit the payment of benefits, even benefits assigned to an AP in a separate interest QDRO, over a period extending beyond the joint lives or life expectancies of the P and the AP.  See Treas. Reg. Section 1.401(a)(9)-6 for RMD rules applicable to DB plans, and 1.401(a)(9)-8 Q&A-6 for special RMD rules for QDROs and APs.  Only if the AP dies before the P can the life or life expectancy of the AP's beneficiary be used to comply with the RMD rules.  As a result, if a plan permits an AP to elect a J&S, such election may (but not must) violate the RMD rules (e.g., if the AP's beneficiary's life expectancy extends beyond the P's and AP's joint life expectancies).  It is an administrative nightmare to attempt to keep up with which AP J&S elections violate the RMD rules vs. those that don't.  In fact, I would wager the vast majority of plans (if not all) that permit AP J&S elections violate the RMD rules at some point.  This plan may have decided that prohibiting all AP J&S elections was the only administratively feasible method of complying with the RMD rules, which I believe is a legally defensible position.  After all, the RMD rules require plan documents to provide that the RMD rules will override all benefit options that are inconsistent with the RMD rules.

[jpod]

FGC:  Yes, I have seen that in the DOL document, but we all know DOL has some strange views on the QDRO rules.  Therefore, I was asking what people thought the law really is on this point.  Thanks to all those who took the time to respond. 

[Peter Gulia]

jpod, you're right that PWBA in the QDRO booklet states some views that aren't supported by the statute, and some that are contrary to the statute.  When I've written about QDROs for publication, I've sometimes called out a few of the differences.

I've never had a client that needed an answer to the question you asked, and the answer was beyond what would be useful to the readers of the books for which I did a QDRO chapter.

The statute is a pile of gibberish.  If a client wanted my opinion, I doubt it would be a more-likely-than-not opinion (51%) in either direction.  I suspect either conclusion could be expressed in a reasonable-basis opinion and even as a substantial-authority opinion.

As your post yesterday hints at, sometimes no one has enough need to get a lawyer to reason through the text.

 

[Luke Bailey]

To answer Fiduciary Guidance Counsel's question, I haven't done any research and am not sure, but I don't yet see in anything that has been cited a prohibition on a plan's having different distribution provisions for an AP than for participant. ERISA section 206(d)(3)(E)(i)(III), for example, simply says that a plan WON'T fail the requirements if it offers the AP the same distribution forms as participant, other than J&S with AP primary. It doesn't say the plan HAS to provide those options in order to comply.

[jpod]

Luke Bailey:  Huh?  The statute says a DRO is a QDRO, and therefore binding on the Plan, if it says that the AP can select any distribution option available to the P. Therefore, how can the Plan by its terms restrict the AP to fewer options? 

[Luke Bailey]

So Jpod, although I realize that reasonable minds can differ on this, and I really don't know what the answer is and am not even sure this is not covered by guidance either way, I will stick to my guns on the statutory interpretation part of this. Remember, the QDRO rules were enacted primarily to overcome the antialienation provisions of the Code and ERISA. 414(p)(3) is, I think, most naturally interpreted  as sayin, "Hey, as long as a DRO does not ask for a benefit form not available to the participant, it's OK for the plan to accept it." But that is not the same thing as saying that the plan cannot by its terms narrow the range of options available to APs as opposed to participants. Note that 414(p) doesn't say, "Here is what a QDRO is. You must do this and pay anything that qualifies as a QDRO." It just describes QDROs. The operative language is in 401(a)(13) which says, again, not the all QDROs must be obeyed, but rather that paying a QDRO does not disqualify the plan for violation of antialienation.

Maybe there is case law to the contrary, or soft guidance from DOL. I am just telling you what the statute seems to require.

[My 2 cents]

What possible reason could there be, logically, for restricting the options available to an alternate payee for receipt of their separate property assignment beyond any limitations on the options available to a participant?  The alternate payee should be treated as fairly as the participant.

[jpod]

Luke Bailey:  I don't know if this changes your mind, but if you're thinking is that a plan merely MAY comply with a QDRO, you're wrong, at least for a Title I plan.  Section 206(e) of ERISA says that a plan MUST comply with a QDRO.  So, we're back to my original question (which I won't repeat for the umpteenth time).