Is a hardship before a QDRO allowed?

[Santo Gold]

Participant is going through a divorce and the plan administrator has been contacted by the spouse's attorney regarding information on the participant's 403(b) account.  Currently, there is no QDRO, although that likely will be coming.

The participant claims she needs to take a hardship from the plan.  However, is that allowable if the plan administrator knows that the spouse may be entitled to a share of this account, even if no QDRO has yet been produced?

 

Thanks

[RatherBeGolfing]

14 minutes ago, Santo Gold said:

Participant is going through a divorce and the plan administrator has been contacted by the spouse's attorney regarding information on the participant's 403(b) account.  Currently, there is no QDRO, although that likely will be coming.

The participant claims she needs to take a hardship from the plan.  However, is that allowable if the plan administrator knows that the spouse may be entitled to a share of this account, even if no QDRO has yet been produced?

 

Thanks

The answer should be in the plans QDRO procedures

[QDROphile]

Yes, but the answer in the QDRO Procedures will not likely explicitly cover the circumstances; the answer will be implicit. Also, be very careful.  If the QDRO Procedures require the plan administrator or other QDRO fiduciary to take into account the possibility of a domestic relations order before the receipt of a domestic relations order, the QDRO Procedures are outside of the terms of the statute (both tax and ERISA) and the QDRO fiduciary must carefully consider if the QDRO Procedures are in line with appropriate consideration of participant rights .  The adoption of QDRO Procedures is a fiduciary matter and the interpretation of the QDRO Procedures is a fiduciary matter.  The primary fiduciary duty under ERISA is to act in the best interests of participants and beneficiaries.

[Pam Shoup]

What does the Fiduciary Plan Administrator want you to do?  A QDRO alternate would also qualify as a participant/beneficiary under the plan so there is a fiduciary duty to the alternate too.  What happens if the QDRO requires that 100% of the proceeds be paid to the alternate and you paid out the hardship to the particpant?  Also, is the participant trying to get money out the plan to avoid paying it to her spouse?  Is there a property settlement agreement or divorce order that specifies what the alternate will be getting?  If so, then you know for sure that the Plan Administator will have a fiduciary duty to the alternate too.

[RatherBeGolfing]

5 hours ago, QDROphile said:

Yes, but the answer in the QDRO Procedures will not likely explicitly cover the circumstances; the answer will be implicit. Also, be very careful.  If the QDRO Procedures require the plan administrator or other QDRO fiduciary to take into account the possibility of a domestic relations order before the receipt of a domestic relations order, the QDRO Procedures are outside of the terms of the statute (both tax and ERISA) and the QDRO fiduciary must carefully consider if the QDRO Procedures are in line with appropriate consideration of participant rights .  The adoption of QDRO Procedures is a fiduciary matter and the interpretation of the QDRO Procedures is a fiduciary matter.  The primary fiduciary duty under ERISA is to act in the best interests of participants and beneficiaries.

The statute calls for a plan to "establish reasonable procedures to determine the qualified status of domestic relations orders and to administer distributions under such qualified orders".  Some practitioners interpret the reasonable procedure part of the statute to mean that the procedures can be more liberal than the statute as long as they are reasonable. In other words a procedure that requires more than the receipt of a DRO is not reasonable, but it could be reasonable to allow a something more liberal like "notification of pending DRO".  

While I agree that the procedure should follow the statute, I have read very few (if any) that are that narrowly tailored.  Chances are good that the procedures in question allow for something more liberal than actual receipt of the DRO, and in that case the procedure should be followed.  Ignoring the procedures (even if they are questionable) could also open the door to a fiduciary breach claim.

 

[RatherBeGolfing]

3 hours ago, PamB said:

Is there a property settlement agreement or divorce order that specifies what the alternate will be getting?  If so, then you know for sure that the Plan Administator will have a fiduciary duty to the alternate too.

Only if that duty has been created by the statute or possibly the QDRO procedures.  

If the plan requires receipt of a DRO (as provided in the statute), the mere existence of settlement agreement does not create a fiduciary duty for the Plan Admin.  In that case, the alternate payee would have a claim against the participant for violating the settlement agreement.  It does not create a claim against a plan that follows its written procedures, which would certainly be reasonable if they follow the statute.

 

[Pam Shoup]

This may be a little off topic, but has anyone else had a restraining order issued against them specifying that no distributions are to be made to the participant until the QDRO has been processed?  We are starting to see these restaining orders in messy divorce cases.  

[ESOP Guy]

I haven't seen it from a court but I have seen plenty of states that are trying to collect child support demanding nothing get paid until they get a QDRO to get the child support in place. 

[JamesK]

Just a random thought but are hardship distributions from a 401(k) plan subject to spousal consent?  If so, the participant's spouse's decision will answer your concerns about the hardship distribution.  

[MoJo]

3 hours ago, PamB said:

This may be a little off topic, but has anyone else had a restraining order issued against them specifying that no distributions are to be made to the participant until the QDRO has been processed?  We are starting to see these restaining orders in messy divorce cases.  

Yup.  We are starting to see them more and more - especially out of California.  AND - they are directed to us as a service provider to the plan - and not to the plan itself (and I would argue that that is smart - there is some doubt as to whether a court can enjoin a plan except through a DRO.  That raises an interesting question - if the plan fiduciaries DIRECT that a distribution take place (and they aren't restrained) but we can't do it, what happens (other than we get fired...)?