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I have received a DRO for a participant who is only partially vested in a 401(k) plan.  The DRO instructs that  we value the vested and unvested portion of account as of a specific date in the past.  And then if/as the Participant vests in the future, the AP will receive a proportionate share of that vesting.  If the Participant doesn't vest, the AP doesn't receive any further funds. 

I am accustomed to qualifying the DRO and immediately segregating the assets, but I cannot give the AP unvested assets and then allow the AP to attain them as the Participant vests.  And I cannot imagine trying to keep track and move half of the newly vested portion over each year as the Participant vests further.  The risk of a recordkeeping error seems high.  This feels like a problematic situation.  The participant will not pay out from the vested portion and attorney indicates no other options.  

Would appreciate feedback as the only other DRO's I"ve dealt with were fully vested.

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You should be able to accommodate, but I understand that it may not be possible under whatever system you use.  I recall that evil Fidelity will not accommodate, and Fidelity is not alone.  If the system will not accommodate and you are bound by the system, then the plan administrator or other QDRO fiduciary should determine that the order is not qualified.  Then the appropriate person (the QDRO fiduciary) should the QDRO Procedures (you did consult the QDRO Procedures, didn't you?) to deal with the phenomenon; there are several reasonable second-best options.  The solution, other than the better solution of having a system that functions properly, is in the drafting of the domestic relations order, but most of the drafters out there are not sophisticated enough to achieve the result that is proposed in this case within the limits of the record keeping systems.  I think it would be very interesting to pursue a claim that the plan is legally obligated to implement the terms that are vexing you, but the stakes are usually so low that such a pursuit is not economically feasible.  The plan should be safe in determining the order is not qualified.

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Maybe I am being dimwitted but I don't see how this can't be accomplished.  You build a spreadsheet doing the initial divide.  You keep the AP's unvested assets in the original account.  Every year you compute the amount the AP is do (if any) and do another transfer.  To me the hard part is making sure there are no distributions made out of the original account without a final accounting of the AP's share. 

I understand why this would be seen as error prone as it is that.  But not doable I don't see that at all.  But I admit it has been over 5 years since I worked in the 4k world and it was mostly balance forward even back then.  But I did do some daily work and that is how I would have solved this problem. 

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What am I missing?  It is certainly doable, but the QDRO has to be read to call for what the parties want and the plan can accomplish.  What the parties want is for the plan to create an account structure for the AP that  matches the account structure of the participant.  Let's assume that is two sub-accounts, one with the employer (partially vested monies) monies and one with the employee (fully vested monies).  If the plan would typically have two sub-accounts for the participant then it can have two additional sub-accounts for the AP.  The employee monies take care of themselves.  The QDRO should specify that the AP can only receive a distribution from the employer monies sub-account no earlier than the earlier to occur of (1) full vesting; or (2) the participant terminates employment.  Doesn't everything become easy peasy?

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Clearly this is doable BUT it is 100% manual (I know of no system that can automate the process) and we, as a service provider, will NOT do it.  There is too much risk and we couldn't charge enough in fees (and to whom) to make it worth it.  Our standard response is "administratively not feasible = not qualified."

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MoJo, what part of the process that I described is objectionable?  Are you saying that your system has no way to implement a separate interest account for an alternate payee?

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47 minutes ago, Mike Preston said:

MoJo, what part of the process that I described is objectionable?  Are you saying that your system has no way to implement a separate interest account for an alternate payee?

What you propose is "one" account into which both the participant and AP money exists, with "sub-accounts" identifying which is allocated to the participant and which is allocated to the AP.  Who controls the investments in the account?  How do you allocate subsequent employer contributions?  What if the AP is entitled to and wants a distribution of some or all of the balance to their benefit.

In any event, if you establish a "separate account" entirely for the AP (normal process for us), then you still have the problem of tying vesting for the AP to the census information *only* being provided by the employer for the participant.  It's a manual process to then update the AP vesting when the participant vesting increases, and as well a manual process to forfeit the unvested portion of the AP's account/sub-account should the participant terminate.

All in, *not* a service we can/want/will provide, and hence "administratively not feasible."  And yes, our "standard" QDRO policy (required if we administer) indicates AP's can only take from the vested portion of the participant's account.

 

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46 minutes ago, QDROphile said:

Mike Preston:

One runs into this all the time.  I think it is a questionable excuse. I advise clients to put the record keeper on notice that if the "inability" is successfully challenged the plan will look to the record keeper to be made whole.  

Interesting - because we've never seen anyone challenge our process - and I would expect clients (plan sponsors) wouldn't want to be bothered by this either), so we'll take the risk of losing a client for the one or two or so of these we see a year.

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I know the people responding to this are ERISA attorneys and people who work on DROs much more than I do. There is broad consensus from all that this is permitted. However, I always thought, and been taught, that the DRO couldn't order a benefit that the participant wasn't entitled to; it had to be restricted to the vested balance. How is splitting non-vested money permitted? The participant/employee has no right (yet) to these funds and "distributing" from their account via a QDRO seems to distribute a benefit they aren't entitled to under the plan. Thanks for any clarification.

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MoJo: Denying the order because you have a problem administering a legal order will subject you/the plan to violation of ERISA. Mike Preston is absolutely correct (I draft and administer many QDROs as well as do court testimony in these cases).  The fact that no one has challenged your process doesn't mean you are right and will make no difference to someone who knows their rights.  Just hope neither Mike nor I are ever the QDRO experts on the other side! :-)

Here is some info for you that is on point:

image.png.bbd02fe77fc0941aaedd2c595e699126.png

image.png.a96c5e63ebd48df751ef3e6030963558.png

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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1 hour ago, Kac1214 said:

I know the people responding to this are ERISA attorneys and people who work on DROs much more than I do. There is broad consensus from all that this is permitted. However, I always thought, and been taught, that the DRO couldn't order a benefit that the participant wasn't entitled to; it had to be restricted to the vested balance. How is splitting non-vested money permitted? The participant/employee has no right (yet) to these funds and "distributing" from their account via a QDRO seems to distribute a benefit they aren't entitled to under the plan. Thanks for any clarification.

The key here is to note the QDRO did NOT order to pay the benefits BEFORE the person became vested.  It says once the person becomes vested THEN the Alt Payee has a right to those benefits. 

So the Alt Payee has to wait years to find out if she will be paid a benefit or not.  So the DRO is qualified. 

See Larry Star's quoted material for additional information and examples. 

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14 hours ago, ESOP Guy said:

So the Alt Payee has to wait years to find out if she will be paid a benefit or not.  So the DRO is qualified. 

*IF* the DRO provides for a completely deferred benefit in a DC plan (zero rights to the AP to direct investment, take distributions, etc.) unless and until the participant become fully vested - that is indeed a different scenario - but frankly one I would think would consistent "malpractice" on the part of the AP's attorney.  Leaving the divorces spouse/participant in charge of the account until a future date is not something I would ever advice a DR client (I used to practice law and handled divorces....)  There is a reason they are getting divorced.

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14 hours ago, Larry Starr said:

MoJo: Denying the order because you have a problem administering a legal order will subject you/the plan to violation of ERISA. Mike Preston is absolutely correct (I draft and administer many QDROs as well as do court testimony in these cases).  The fact that no one has challenged your process doesn't mean you are right and will make no difference to someone who knows their rights.  Just hope neither Mike nor I are ever the QDRO experts on the other side! :-)

Here is some info for you that is on point:

image.png.bbd02fe77fc0941aaedd2c595e699126.png

image.png.a96c5e63ebd48df751ef3e6030963558.png

No.  We're not refusing to do something the plan "can" do.  We are refusing to do something that is not part of our services offered to the plan.  Should the plan sponsor wish to manually handle this situation (which, I would contend is "administratively not feasible" - a sound reason for denining the "Q" on the DRO), so be it.  And I'd be happy to go to court to explain to a judge what can and can not be done.

But in a daily valued  environment, handling anything manually is not a reality.

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2 minutes ago, MoJo said:

 Leaving the divorces spouse/participant in charge of the account until a future date is not something I would ever advice a DR client (I used to practice law and handled divorces....)  There is a reason they are getting divorced.

I am not sure the way the QDRO is set up in the original question is "smart" thinking but it appears to be legal thinking.

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1 minute ago, ESOP Guy said:

I am not sure the way the QDRO is set up in the original question is "smart" thinking but it appears to be legal thinking.

What's legal and what's possible are two different things.  When I went "in house" it didn't take me long to reverse my opinions on what can/should be done from when I practiced law.

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52 minutes ago, MoJo said:

What's legal and what's possible are two different things.  When I went "in house" it didn't take me long to reverse my opinions on what can/should be done from when I practiced law.

Can't agree more there.  I wish more plan documents were written by attorneys that had TPA experience or talked to TPAs and a few HR people. 

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40 minutes ago, ESOP Guy said:

Can't agree more there.  I wish more plan documents were written by attorneys that had TPA experience or talked to TPAs and a few HR people. 

Well, most of the "better" ERISA attorneys I know don't draft plan documents anymore.  They review and edit the documents provided by their service provider.  When an attorney "insists" that their document is better, it's time pass on that client.

BTW, we charge $1,000 annually extra for an "outside" document....  The 1st volume submitter (when a client transitions in) is free, and then for restatements, the faster they respond to the plan information questionnaire we send out, the cheaper the restatement fee. 

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It should totally be billable but it doesn't violate any terms of the plan and doesn't give a benefit not owed to the participant so I don't see how you can say it's not qualified.

Move the vested and non-vested part to the alternate payee account. Only pay the vested portion each year.

It's not rocket science.

 

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