Non-ERISA 403(b) and QDRO's

[Belgarath]

Just wondering what the rest of the world encounters in "real life" on this. Plan is set up to be a non-ERISA - deferral only plan. In order to avoid ERISA status, there are operational requirements in addition to the Plan provisions. So, the Plan/Administrator, upon receipt of the DRO, refers it to the Vendor, 'cause the Plan Administrator doesn't want to kick Plan into ERISA status by making a determination if it is a valid QDRO or not. The Vendor kicks it right back, and says, "I'm not going to make this determination."

A similar situation could occur with hardship withdrawals, for example.

How do you folks and/or your clients typically handle this? You are between a rock and a hard place...

[Carol V. Calhoun]

This seems like something that should have been dealt with in the original dealings with the vendor. If the employer is trying to make sure it doesn't have these obligations, it should not permit vendors to participate unless they agree to handle the necessary functions. 

[QDROphile]

Interesting confluence of:

1.  DOL does not understand QDROs, and

2. DOL is disingenuous about ability to maintain 403(b) plan outside of ERISA.

[Belgarath]

Carol - I completely and totally agree that "shoulda woulda coulda" - but the simple fact is that many, possibly most, just didn't. So that leaves the situation(s) I mentioned, (plus probably others) so I'm wondering how folks deal with it? I firmly believe that there are tons of these plans out there, and I suspect that employers have been routinely performing such functions so that participants can get a distribution, although I have no hard evidence to back that.

[Peter Gulia]

How an employer might react to this kind of stand-off might relate to several facts and circumstances, including:

 

Does the employer’s name appear anywhere in the order?

 

How confident is the employer that a court would decide that the 403(b) payroll practice is not a plan within the meaning of ERISA § 3?

 

If the employer adopted a written plan (even if not under ERISA § 402 and only to tax-qualify under IRC § 403(b)), does that writing impose an obligation on the employer?

 

Does the 403(b) contract incorporate by reference, or refer to, the written plan?  If so, might one interpret the contract to impose an obligation on the insurer or custodian?

 

Is the 403(b) contract (whether an annuity contract or a custodial account) a “group” or “individual” contract?  How much obligation, if any, does the contract impose on the employer?

 

Does the domestic-relations court have sufficient jurisdiction to command the employer to act?

 

If the employer has the right to refuse to decide whether an order is a QDRO, will the employer have the fortitude to resist the divorcing people, the insurer or custodian, and attorneys?  Will the employer face down a judge who threatens the employer?

 

How do potential litigation expenses affect each player’s choices?

 

I’ve advised both employers and insurance/investment providers about the stand-off on who responds to a domestic-relations order.  Feel free to call me if you want more help.

 

[Belgarath]

Thanks Peter. I don't actually have any such situation - my questions are, at this point, academic.

The small 501(c)(3) plans that often use elective deferral only plans, rarely engage legal counsel in situations where it should be sought, I'm willing to bet. Certainly they don't when sponsoring 401(k) plans...

[MoJo]

Peter:  You pretty much nailed it.  I work for such an "insurer" (among other things) who continually is working with employers with allegedly non-ERISA 403(b) "arrangements."  First and foremost - in virtually all the cases I've seen recently, they ARE ERISA PLANS - but the employer won't admit it.  This becomes an issue when the plan changes vendors and we get a glimpse at what they are and have been doing.  We do DRO services - but ONLY as a ministerial service subject to acceptance by the employer of our guidelines.  Acceptance of the guidelines is control that basically makes the arrangement ERISA covered.  Some actually sign the documents not realizing the consequences (and basically it's because they did the same at their prior vendor), and some refuse - which results in the "stand-off."  The most recent case involved an employer who (after we pretty well documented that they are an ERISA plan - and their attorney agreed) refused to sign our guidelines and then said they will "accept" any DRO signed by a judge and filed as a QDRO (without review) and that certainly doesn't have any consequences.

Sometime I wonder why I sales people court these types of business....

[Peter Gulia]

Mojo, thank you for the kind words.

Belgarath, I concur with your observation that there are many more ERISA-governed plans than some charitable-organization employers admit.

 

 

[jpod]

If the employer takes the position that the plan is not subject to ERISA, and that position is correct, is the DRO even enforceable against the employer or the plan?  If this analysis is correct, then isn't the(an) answer to ignore the DRO?  (I would recommend advising the parties and the court of this and why it won't be honored.) Of course, it's possible that the plan document has all the usual QDRO rules, in which case my analysis sort of flies out the window.    

[Patricia Neal Jensen]

I agree with Carol (of course).  Employer should not touch this.  Also think jpod raises a good point.

[jpod]

How could you not "touch this" if sloppy language in the plan document says that you must touch it?

[Peter Gulia]

If a domestic-relations order is directed to a non-plan not governed by ERISA, ERISA doesn't preempt State law (including a State court's order).  Whether a person must, may, or must not do (or refrain from doing) something might turn on the provisions of all relevant contracts and how much jurisdiction the court has to command the person's act.

 

[jpod]

Would a judge presiding in a divorce case have jurisdiction over a third party like a plan or the employer?  That would surprise me.  Isn't that why it was necessary to write Title I of ERISA to require plans to comply with a QDRO? 

[Mike Preston]

Many state court judges rebel against the reach of federal rules.  I testified in a divorce matter once and I, ever so gently, let the judge know that he could not compel an ERISA fiduciary not a party to the divorce to take any specific action other than through a QDRO. The judge issued an opinion that included a paragraph that said something like this: "This court declines to exercise its option to order {redacted} to perform certain acts requested by Plaintiff."  He wanted me to know that if he felt like it, he could have ordered {redacted} to do anything! 

[QDROphile]

As much as it makes me gag to contemplate California joinders in any capacity, if the position (questionable as it may be) is that the plan is not subject to ERISA, then the joinder approach is effective.  Of course, the state law has to provide for the joinder of the plan, otherwise it is not apparent how the court would have jurisdiction over the plan or whatever the provider's product is (account, annuity?).  The court could stick it to the participant and order the participant to bring about the result contemplated by the order, and then the participant could hire Peter Gulia to deal with the provider or defend the participant with respect to the contempt order. 

[Belgarath]

Wow, even worse than I thought! Interesting discussion. So taking something a bit less "legalistic" than a QDRO, what about a hardship withdrawal? Plan allows it, but subject to the vendor/funding company decision. Funding company, in turn, says they won't process it unless the Plan Administrator "signs off" on it. So a participant who has a legitimate hardship can't get it. Is this now a fiduciary problem because investments weren't properly selected? Can State law compel one party or the other to "do it" or does this just circle right back to the same issues discussed above? And while all this plays out with the lawyers fighting, the participant's hardship, which is presumably an immediate need, sits in limbo. What a ridiculous set of conflicting rules/responsibilities.

 

[MoJo]

14 hours ago, QDROphile said:

As much as it makes me gag to contemplate California joinders in any capacity, if the position (questionable as it may be) is that the plan is not subject to ERISA, then the joinder approach is effective.  Of course, the state law has to provide for the joinder of the plan, otherwise it is not apparent how the court would have jurisdiction over the plan or whatever the provider's product is (account, annuity?).  The court could stick it to the participant and order the participant to bring about the result contemplated by the order, and then the participant could hire Peter Gulia to deal with the provider or defend the participant with respect to the contempt order. 

Amen to the thoughts on California's joinders in domestic relations court.  They are the definition of "PITA" from the service providers perspective.

With respect to non-ERISA plans -we find, surprisingly enough, that most include DRO provisions, and some state laws (I don't know how many, because we haven't looked at them all) require such provisions in governmentals.

As a related side - interestingly enough, a state court judge in a domestic relations case almost always has jurisdiction over those that hold "marital assets" which would include retirement plan benefits - and can always consider them in fashioning a property split.  The thing of it is, that state court judge cannot compel the "qualified plan" (under the provisions of Code Section 401(a)(13) and related sections and regs) to pay benefits to one other than the participant (i.e. the alternate payee) without a QDRO.

Elsewhere there is a thread where we've had a "discussion" on what the court could or could not do with respect to the actions of a "service provider" separate and distinct from the plan.  In many cases, we are a "pure" bundled recordkeeper and don't hold the assets (which are held in a trust with an unaffiliated trustee/trust company) and California in particular seems to think they can enjoin us from processing distributions.  The problem is, the court does has jurisdiction over us (we operate in 49 states including California) and can "order" us to do or not do - but what would happen if a plan fiduciary "directs" us in a way contrary to the Court's order?  That isn't a problem with a non-ERISA plan - and frankly, we haven't been a party to a divorce action involving one of those.  I expect, absent a fiduciary in those cases, we wold abide by the court's orders.

When we get served by California, we politely reply that their order impacts us, but not the plan - and that maybe the attorney wants to amend to include the trustee or the employer....  And then we abide by the order and wait till the DRO is issued.

Fortunately, we haven't (yet) found ourselves between a rock (the court order) and a hard place (a contrary fiduciary direction).

[Peter Gulia]

Belgarath, there are situations in which a court has sufficient jurisdiction to order an insurer or custodian to pay a hardship or unforeseeable-emergency distribution.

 

[Belgarath]

Thanks Peter. Good to know. Hopefully the situation will never arise!

[MoJo]

25 minutes ago, Fiduciary Guidance Counsel said:

Belgarath, there are situations in which a court has sufficient jurisdiction to order an insurer or custodian to pay a hardship or unforeseeable-emergency distribution.

 

PMJI:  I would say that the court cannot (ever!) order the PLAN to do this, but whether or not the court could order the PARTICIPANT to do so is another matter.  I think it is defensible that a court cannot order a participant to do or not do something which is an ERISA protected right - but a court can order someone to "pay" someone else, and send them to jail (contempt) until they do so - which may be an incentive....

[QDROphile]

Why can't a state court ever order the holder of a non-ERISA account/annuity to give up funds?  A creditor can get a court to order a judgment debtor's bank to turn over funds in the bank account. 

[MoJo]

8 minutes ago, QDROphile said:

Why can't a state court ever order the holder of a non-ERISA account/annuity to give up funds?  A creditor can get a court to order a judgment debtor's bank to turn over funds in the bank account. 

I can think of a few reasons.  Generally It still may be subject to the a variety of anti-alienation provisions not required under ERISA.  It may be subject to state based exemptions from claims of creditors (as many states do with IRAs) or  there may be many other state (or even federal) exemptions against such things.

The problem is, each scenario in each state must be evaluated to see if, when, and how a court could order such things - so a blanket "they can" or "they can't" will never be the right answer.

[Carol V. Calhoun]

On 2/21/2018 at 4:51 PM, jpod said:

If the employer takes the position that the plan is not subject to ERISA, and that position is correct, is the DRO even enforceable against the employer or the plan?  If this analysis is correct, then isn't the(an) answer to ignore the DRO?  (I would recommend advising the parties and the court of this and why it won't be honored.) Of course, it's possible that the plan document has all the usual QDRO rules, in which case my analysis sort of flies out the window.    

Yes, the DRO is enforceable against the employer or the plan.  The QDRO provisions do not provide any additional rights to a domestic relations court; rather, they are a limitation on what a domestic relations court can otherwise divide with respect to the division of an ERISA plan.

To make this clearer, you can't object to an order dividing a bank account because it does not comply with the requirements for a QDRO.  And the bank (as well as the parties) must comply with that order.  Similarly, while a non-ERISA plan is not subject to QDRO requirements, it also does not get the ERISA preemption that would allow it to refuse compliance with a domestic relations order.