Can a processed QDRO be appealed / reversed?

[calexbraska]

We processed a QDRO that asked that the Alternate Payee receive 50% of the account, as of 1/1/2018, including earnings from 1/1/2018 through the date of division.  The QDRO was processed and the Alternate Payee too her portion as a lump sum distribution.

Now the parties are saying Alternate Payee's portion should not have included earnings.  The QDRO clearly said to include earnings, and all parties and their attorneys signed it, so there was no error on our part.  But now the parties want to reverse part of the distribution to the Alternate Payee (i.e. they want the AP to return the earnings amount to the Participant's plan account).

If the AP had left her portion in a qualified retirement plan, I'd just have the parties execute a new QDRO to transfer the earnings portion from the AP back to the Participant.  But, since the AP took the money as cash, this is not an option.  Is there any way to reverse the QDRO to get the money back into the Participant's account?

Thank you!

[QDROphile]

If you represent the plan, the plan should not be looking for a way to accommodate.

[Larry Starr]

51 minutes ago, calexbraska said:

We processed a QDRO that asked that the Alternate Payee receive 50% of the account, as of 1/1/2018, including earnings from 1/1/2018 through the date of division.  The QDRO was processed and the Alternate Payee too her portion as a lump sum distribution.

Now the parties are saying Alternate Payee's portion should not have included earnings.  The QDRO clearly said to include earnings, and all parties and their attorneys signed it, so there was no error on our part.  But now the parties want to reverse part of the distribution to the Alternate Payee (i.e. they want the AP to return the earnings amount to the Participant's plan account).

If the AP had left her portion in a qualified retirement plan, I'd just have the parties execute a new QDRO to transfer the earnings portion from the AP back to the Participant.  But, since the AP took the money as cash, this is not an option.  Is there any way to reverse the QDRO to get the money back into the Participant's account?

Thank you!

NO; the distribution has been made in accordance with the valid court order.  This bell cannot be unrung via the plan.  If they have a problem and the funds were moved into an IRA, the court can issue a new order giving part of the IRA that the parties are considering "too much" back to the ex- spouse and that doesn't require a QDRO. The plan did what it should have and is done with this transaction.

[shERPA]

2 hours ago, Larry Starr said:

 The plan did what it should have and is done with this transaction.

Quite right.  Participants, APs and their attorneys often try to get the plan and employer involved in things beyond their scope. 

[JamesK]

My coffee exited through my nose when I read your question.  Tell the participant and AP that they are victims of their own representatives' incompetence and their only resort for a solution is through them. 

You can also let them know that the DRO they submitted is the customary way of dividing retirement assets.  Have you ever seen a DRO for a defined contribution plan that did not allocate gains and losses through the date of distribution?  If I did, I would have pointed it out because it is just not done (and for good reasons).  These issues typically arise when there is a significant decline in the value of the investments.  I hope that that is not the case for these individuals. 

[Larry Starr]

You raise an interesting issue; I always have to explain to the lawyers I am drafting QDROs for (for my client plans) WHY there is no allocation of gains through the date of distribution.  That's because the plans are mostly trustee directed balance forward plans where the allocations of gains and losses occurs only on the last day of every plan year. So, if the award is for 1/2 of the account as of 3/18?18 (on a 12/31 year end plan), then it's half of the 12/31/17 account value UNTIL 12/31/18. If the distribution is made anytime prior to 12/31/18, there is no change in the value.  If it holds over past 12/31/18, then it will get its share of the gains/losses for the 2018 calendar year.

So as you can see, it is plan specific. So, even though the language may talk about allocating gains and losses, the actual gains and losses allocated may very well be zero since there is no allocation applicable until the plan year ends.

We also just had a distribution to an ex that was exactly $1,000,000 (so long as made during 2018).  And we all had to fight the ex-spouse's lawyer in Oregon who put a November, 2017 date in the divorce decree and expected gains and losses until the payout. I should point out that even the EX was fighting with her lawyer because she and her ex-husband agreed it would be exactly $1mill in this year and they were all very happy with that (the relationship between the two exes is actually pretty good; always nice when that happens).  The lawyer ran up thousands of dollars in extra expenses fighting her own client, including hiring someone else to draft a QDRO (which was deficient) even though the parties actually wrote in the divorce decree that I was to do it (I didn't ask for that; it's just that I have worked with both of them for many years and they knew I would make happen what it was that they wanted to do).  Now, we are thinking of bring a suit against the lawyer! Sheesh!!!!

[JamesK]

Good point regarding balance forward plans.  

[ESOP Guy]

12 hours ago, Larry Starr said:

You raise an interesting issue; I always have to explain to the lawyers I am drafting QDROs for (for my client plans) WHY there is no allocation of gains through the date of distribution.  That's because the plans are mostly trustee directed balance forward plans where the allocations of gains and losses occurs only on the last day of every plan year. So, if the award is for 1/2 of the account as of 3/18?18 (on a 12/31 year end plan), then it's half of the 12/31/17 account value UNTIL 12/31/18. If the distribution is made anytime prior to 12/31/18, there is no change in the value.  If it holds over past 12/31/18, then it will get its share of the gains/losses for the 2018 calendar year.

 

Since almost all ESOPs are not publicly trade stock and done balance forward we have this conversion all the time also.  In fact if a company has been my client for a while they are typically trained to point this out to the attorneys if they are asking questions while drafting the DRO.  They might as well say split the assets as of a given 12/31 for a 12/31 PYE ESOP.  I do get a few clever ones that say the valuation date closest to the divorce date.  So for a 12/31 PYE starting on 7/2 you use the next 12/31 stock price. 

The fact of the matter is most attorneys think of just about all retirement plans from the daily 401(k) perspective.   In fact I am currently getting calls almost weekly from one AP because her attorney told her QDRO resolutions are very quick.  So she went and agreed to buy a house using her money from the QDRO for the down payment.  The 401(k) money was split and paid very quickly.   I just got the stock price for 12/31/2017 for the ESOP.   We won't be paying the AP for another month while we get all the ESOP's work done. 

[QDROphile]

Mr. Starr, please elaborate on "I am drafting QDROs for (for my client plans) ... ."  Are you drafting orders that will be applicable to the plans that are your clients, plans that you represent?  Who  is your client when you draft an order?

[Larry Starr]

First, PLEASE call me Larry.

Second, I draft QDROs for participants in plan that we provide services for (I used to offer QDRO drafting for anyone who needed it, but I have restricted my practice for the last number of years to just my client plans).  I actually am hired by one of the attorneys for either the participant of the soon to be ex and draft the order for the attorney to present to the court.  I am not a lawyer, so while I can practice ERISA "law" as an Enrolled Agent, domestic law is another issue.  Therefore, I provide the order to the attorney as their work product for them to take to the judge. Technically, my "client" is the lawyer for one of the parties.

Is that what you are looking for?

 

[QDROphile]

Yes, thank you for the response.  I am always curious about ways to implement QDROs effectively and efficiently for everyone involved, including the plan.  The domestic relations lawyers, by themselves, generally do not do a very good job.  The combination of your technical expertise and your knowledge of the plan certainly is a shortcut to the goal.  How do you establish contact with the lawyer who wants to submit an order to the plan of your client?  Often the first the plan knows of an order is the submission of a draft order.  And you can call me Querly.  Now if we can only find Moe, we may have an act.

[Larry Starr]

Here is what we tell the employer:

'If any employee comes to you talking about a divorce and the retirement plan, tell the employee to tell their LAWYER to call ME. That way, we carve you out of being involved in your employees domestic problems and someone else will pay me to do what needs to be done so it won't cost you anything".

Most employees do bring it up with the employer long before it gets to the QDRO stage.  It's only rarely that a DRO shows up for us to review for one of our plans where we didn't know it was going on.

 

[QDROphile]

When the order comes in, who determines whether or not it meets qualification requirements?

[Larry Starr]

22 hours ago, QDROphile said:

When the order comes in, who determines whether or not it meets qualification requirements?

I do, on behalf of the plan administrator.  Of course, if it's my order (which it usually is), it's sort of a non-question!

[QDROphile]

It leads to another question.  Are you concerned about the prohibition in IRC section 4975(c)(1)(F):

"receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan." ?

Determining qualification of a domestic relations order is a fiduciary function; a fiduciary is a disqualified person.  Receipt of payment for assistance to the lawyer who is drafting/submitting a domestic relations order is receipt of consideration for your personal account,* in connection with a QDRO, which may be a transaction involving the income or assets of the plan.  I have not researched the meaning of "transaction" under section 4975(c)(1) (F), but I imagine high scrutiny is applied under the self-dealing provisions of the prohibited transaction rules.  Also, payment by the for your services in administering the QDRO could be a "transaction" involving plan assets under (F).  There is an exemption for reasonable compensation for necessary services.  That covers pay to a QDRO fiduciary for the services to the plan relating to the QDRO.  I do not know what happens when that gets tangled up with other compensation to the disqualified person relating to production of the QDRO.

*The opportunity for personal outside-the-plan compensation is solicited from another plan fiduciary, which would make me nervous in context and by itself, but that involves further consideration and the prohibited transaction maze make my head hurt. 

[Larry Starr]

18 hours ago, QDROphile said:

It leads to another question.  Are you concerned about the prohibition in IRC section 4975(c)(1)(F):

"receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan." ?

Determining qualification of a domestic relations order is a fiduciary function; a fiduciary is a disqualified person.  Receipt of payment for assistance to the lawyer who is drafting/submitting a domestic relations order is receipt of consideration for your personal account,* in connection with a QDRO, which may be a transaction involving the income or assets of the plan.  I have not researched the meaning of "transaction" under section 4975(c)(1) (F), but I imagine high scrutiny is applied under the self-dealing provisions of the prohibited transaction rules.  Also, payment by the for your services in administering the QDRO could be a "transaction" involving plan assets under (F).  There is an exemption for reasonable compensation for necessary services.  That covers pay to a QDRO fiduciary for the services to the plan relating to the QDRO.  I do not know what happens when that gets tangled up with other compensation to the disqualified person relating to production of the QDRO.

*The opportunity for personal outside-the-plan compensation is solicited from another plan fiduciary, which would make me nervous in context and by itself, but that involves further consideration and the prohibited transaction maze make my head hurt. 

Not at all concerned.  While I may be a disqualified person, I am NOT a fiduciary.  Also, I do not actually make the decision; I advise the plan administrator who makes the decision and controls the assets.  In fact, if I am hired by the participant's (or ex's) counsel, it relieves the plan of paying me anything to review the QDRO on the plan's behalf because I do not charge the plan for QDRO review if it's my draft that is submitted.  My counsel reviewed these issues many years ago (with particular attention to the unauthorized practice of law as well) and we are quite convinced that we are operating correctly.