Trustee to the ESOP / Plan Administrator

[herb lindberg]

Our ESOP plan document and the federal guidelines on payment to an alternate payee are the same.  We received a DRO which became a QDRO.

Payment to the alternate payee per federal law in this particular QDRO will be in 5 years.  We have in the past QDROs segregated alternate payee's funds to a third party and paid funds to the alternate payee per the QDRO federal rules.  We believe federal law allows for early payment if we choose..  We do not necessary want to set a precedent and allow alternate payee to access funds early.  We want to follow our past practice of following federal law on payment to an alternate payee.  In this case we believe the alternate payee could use the funds early.  If we decide to pay the alternate payee early which federal law allows, can we: (1). negotiate a 'discount' on the funds the alternate payee will receive;  (2).  does  this set precedent for a future QDROs

Thanks

[Peter Gulia]

When you ask your lawyer for her advice, you’ll want to consider whether the court order delivered to the plan’s administrator “clearly specifies—

 

(ii)   the amount or percentage of the participant’s benefits to be paid by the plan to [the] alternate payee, or the manner in which such amount or percentage is to be determined [and]

(iii)  the number of payments or period to which such order applies[.]”

 

ERISA § 206(d)(3)(C), 29 U.S.C. § 1056(d)(3)(C).

 

If the order received meets those and other conditions and the plan’s administrator decided that the order is a QDRO, the plan pays according to the QDRO.

 

How likely is it that a State’s domestic-relations court made an order that provides the plan’s administrator discretion (or a power to “negotiate”) the amount to be paid to the alternate payee?

 

And if it did so, how likely is it that the order “clearly specifies” everything that must be so specified?

 

Further, the plan’s administrator must consider a fiduciary’s duty to obey “the documents and instruments governing the plan” and duties of exclusive-purpose loyalty, prudence, impartiality, and communication.

 

Nothing in this post is legal advice.

[Adi]

What do the plan and/or QDRO Procedures say on when the Alternate Payee can take a distribution? With respect to whether you can negotiate, I am not aware of anything that would permit that. If the plan determines that the domestic relations order meets the requirements of a QDRO under law, then the Plan is obligated to pay pursuant to the QDRO, in the amount so specified. 

[QDROphile]

I advise plans to determine that an order is not qualified if it has terms that allow either or both of the participant or alternate payee to modify (with or without the participation or agreement of the plan) the terms of the order.  Or, if the offending language is not truly central to the order, to qualify subject to the interpretation that the offending language will be given not effect.

[AKowalski]

On ‎10‎/‎17‎/‎2018 at 2:42 PM, Fiduciary Guidance Counsel said:

How likely is it that a State’s domestic-relations court made an order that provides the plan’s administrator discretion (or a power to “negotiate”) the amount to be paid to the alternate payee?

Discretion is not the same thing as the power to negotiate. 

An example of discretion in this context would be a power to UNILATERALLY decide to pay the QDRO beneficiary less than the QDRO beneficiary is owed at a different time than the QDRO beneficiary is entitled to receive it.  The power to negotiate, by contrast, is an intrinsic creature of common law (contract law) that exists unless some rule curtails it.  Is there some general rule I am not aware of which generally curtails an ERISA plan's ability to enter into arm's length contracts, supported by fair consideration, with its creditors? 

The way I see it, a QDRO beneficiary has a fixed right to receive certain benefits at a certain time, not much different from the winner of a lawsuit or an unpaid service provider.  The QDRO beneficiary has asked to receive those benefits at an earlier time.  It is only fair that the plan agree to dispense those assets at such earlier time only if the beneficiary agrees to an appropriately reduced payment. 

In fact, if the plan pays out the full benefit early, then that is economically equivalent to giving the QDRO beneficiary an interest-free loan, thus depriving the participants in the plan of their expected investment gains on those plan assets for that period of time.  Thus, the failure to account for the time value of money would arguably be a violation of the duty to invest plan assets prudently.  

Instead, the OP suggests discounting the payment in order to account for that short-term interest component.  Such a solution seems eminently reasonable to me. 

[QDROphile]

The law says that payments are to be in accordance with terms of the order.  You might argue that the order says that the PA has discretion to agree to other terms, but I would not buy that argument.  There is a trend in the court cases to look at the PAs role is to treat the QDRO rules for qualification in checklist fashion.  That suggests that PAs should be unwilling to get involved in resolving matters in which judgment or modification is at issue.  This is consistent with general ERISA principles against the PA having any discretion over distributions.  ESOPs are crazy different in some ways regarding distributions (and opinions vary), but I do not think this is one of them, especially if there is no PLAN term covering it.