Do users of IRS-preapproved documents get a choice to preclude a QDRO distribution before the participant reaches age 50?

[Peter Gulia]

Under ERISA and the tax Code, a retirement plan may allow an alternate payee’s QDRO distribution before the participant’s earliest retirement age.  ERISA § 206(d)(3)(E)(ii); IRC § 414(p)(4)(A)-(B); 26 C.F.R. § 1.401(a)-13(g)(3).

 

For individual-account (defined-contribution) retirement plans, many plan sponsors permit an immediate distribution to an alternate payee, perhaps because a practitioner or service provider suggested that to do so is simpler than keeping a court order open for many years while waiting for the participant to reach an earliest retirement age.  (That’s been my advice.)  Yet some plan sponsors might prefer to provide for not paying an alternate payee before the participant becomes entitled to receive a distribution or reaches age 50.  (I’m not advocating this choice; rather, I’m curious about whether it’s even practically available.)

 

Does an IRS-preapproved document afford a user an adoption-agreement or other choice for not providing a QDRO distribution until the participant’s earliest retirement age?

 

Does the document your firm uses afford a choice on this plan-design point?

 

[RatherBeGolfing]

Not in my pre-approved AA, but in the BPD

The section dealing with distributions to alternate payees permits earlier distributions but does not require it.  

Quote

Notwithstanding any provision of the Plan to the contrary, the Plan Administrator may direct the Trustee to distribute all or a portion of a Participant's benefits under the Plan to an Alternate Payee in accordance with the terms and conditions of a Qualified Domestic Relations Order. The Plan hereby specifically permits and authorizes distribution of a Participant's benefits under the Plan to an Alternate Payee in accordance with a Qualified Domestic Relations Order prior to the date the Participant has a Termination of Employment, or prior to the date the Participant attains his earliest retirement age as defined in Code section 414(p).

 

[Peter Gulia]

RatherBeGolfing, thank you!!!!!

One imagines that this provision might not really grant the Plan Administrator absolute discretion.  Rather, if the provision allows any discretion, doesn't ERISA section 404 call a fiduciary to use reasoning and decide similar situations with sufficiently similar responses?

If so, what circumstances would support a decision against an immediate QDRO distribution?

[Kevin C]

Our VS provides for immediate distribution of QDROs provided the distribution is consistent with the QDRO.  It doesn't give a choice.

Quote

Immediate distribution to Alternate Payee. Even if a Participant is not eligible to receive an immediate distribution from the Plan, an Alternate Payee may receive a QDRO benefit immediately in a lump sum, provided such distribution is consistent with the QDRO provisions.

I think a document that tries to allow employer discretion in determining the timing of benefit payments would have a problem under 1.411(d)-4 Q&A 6 (b).

[Peter Gulia]

I found the text RBG quoted in an IRS-preapproved document of a big publisher.  Perhaps the publisher (or another BenefitsLink maven) has some reasoning about why the provision is not troublesome under IRC 411(d)(6).

But even if there is no problem on that tax-law point, I wonder whether the quoted text is contrary to ERISA section 403(b)(4).

And if the plan grants discretion, I wonder what factors a fiduciary would consider in deciding whether to allow or deny an "early" QDRO distribution.

 

[RatherBeGolfing]

Do the two quoted sections above really mean different things?  They both say that the plan may distribute immediately if the QDRO provides for it.  

If it was a requirement, if there was no choice at all, I would expect shall or will rather than may.  

I agree that it would be problematic for the fiduciary to have discretion on a case by case basis, basically deciding that AP1 gets a distribution now but AP2 does not.  Could this not be taken care of with a written plan procedure that dictates whether APs are paid out immediately or not?  Such a procedure does not sound inconstant with either quoted section above and the fiduciary would no longer have discretion.

[Peter Gulia]

ERISA § 403(b)(4) commands:  “Every employee benefit plan shall specify the basis on which payments are made to and from the plan.”

 

If the plan’s administrator adopts a written procedure that says whether the administrator will or won’t allow a QDRO that specifies a distribution before the participant’s earliest retirement age, did the administrator amend the plan?

 

If the procedure is, meaningfully, a plan amendment, might it be invalid if the administrator is not the same person as the plan’s sponsor and the plan did not provide the administrator power to amend the plan?

 

If the procedure is not a plan amendment, does the plan specify the conditions under which the plan will pay a QDRO distribution?

 

[RatherBeGolfing]

Yes I would say its a plan amendment , but not an amendment that would put the pre-approved status in question (at least not with our may example above).  As such it would need to be adopted by someone with the authority to amend the plan.

 

 

[Peter Gulia]

RatherBeGolfing, thank you for your further thought.

And it answers my originating query.  If the writing is logically consistent with the IRS-preapproved document and within what Revenue Procedure 2017-41 allows, a user can get a choice without losing reliance on the IRS opinion letter.

For all BenefitsLink readers, my citation above should be to ERISA section 402(b)(4).

 

[Kevin C]

Quote

The Plan hereby specifically permits and authorizes distribution of a Participant's benefits under the Plan to an Alternate Payee in accordance with a Qualified Domestic Relations Order prior to the date the Participant has a Termination of Employment, or prior to the date the Participant attains his earliest retirement age as defined in Code section 414(p).

Quote

Immediate distribution to Alternate Payee. Even if a Participant is not eligible to receive an immediate distribution from the Plan, an Alternate Payee may receive a QDRO benefit immediately in a lump sum, provided such distribution is consistent with the QDRO provisions.

I agree that both of these are saying the same thing, but not that either allows a fiduciary's discretion in the timing of distributions to an alternate payee.  For the second quote, from our VS document, my thought is that the word "may" is used because the alternate payee's consent is required if the balance is over $5,000.  The plan can't force immediate distribution in a lump sum. 

I did a quick internet search and found a PPA adoption agreement from another document provider that allows the choice of 1) allowing immediate distribution for a QDRO or 2) not allowing distributions to an AP while the Participant continues to be employed before the earliest possible retirement age pursuant to Code section 414(p).

[Peter Gulia]

Kevin C, thank you for the further information, especially about a publisher that offers an adoption-agreement choice.

[revdeb]

My firm's preapproved plan offers that choice in its Adoption Agreement. 

[Larry Starr]

On 1/29/2019 at 1:44 PM, Fiduciary Guidance Counsel said:

RatherBeGolfing, thank you!!!!!

One imagines that this provision might not really grant the Plan Administrator absolute discretion.  Rather, if the provision allows any discretion, doesn't ERISA section 404 call a fiduciary to use reasoning and decide similar situations with sufficiently similar responses?

If so, what circumstances would support a decision against an immediate QDRO distribution?

Peter: None!  I can't imagine a reason why an employer would want to be connected to an employee's ex spouse for umpteen years.  All our QDROs (and I write most of them) provide for immediate distribution if the plan allows, and my plans allow.  I would never council a plan sponsor to do otherwise.

[QDROphile]

Although I was ambivalent about it at best, I had a client that restricted distribution to discourage what the client said was actual experience with raids on the retirement plan via sham divorce, e.g to buy the recreational fishing boat.  This was long before the sham divorce cases were decided.

The very sad economics in many divorces is that the (usually female) former spouse has to (or does, in any event) take distribution in order to pay the divorce lawyer* and otherwise get by after the divorce.

*This gets us into the completely unrelated topic of attempts by divorce lawyers to be named directly or indirectly as a payee or otherwise get first crack at the QDRO distribution, which is troublesome for the plans.

[Peter Gulia]

I had a client for which the business owners believed (without any advice or information from me) that not allowing a QDRO distribution before the participant's earliest retirement age would improve the participant's leverage for a divorce negotiation, if ever there might be a divorce to negotiate.

QDROphile, do you find that some domestic-relations lawyers write the QDRO and fill out the plan's claim form to specify as the alternate payee's address the address of the lawyer's office?

 

[QDROphile]

Yes, I have seen that.  There are at least two phenomena.  One is legitimate; the former spouse has a protective order and uses the lawyer's address to prevent discovery.  The other is the lawyer trying to assure payment out of certain funds.  Not that getting paid is illegitimate, but I believe the anti-assignment rule does not allow anyone to get out in front of a distribution.  How one enforces a creditor claim after the funds are in the hands of the appropriate recipient is not the plan's concern.

I have been involved in discussions about provisions concerning allowing the division of nonqualified deferred compensation in divorces and potential effect on negotiation of property settlement in divorce.  Generally I think it is better to allow all assets to be on the table.  By removing or restricting a significant asset, the settlement can get skewed against the interests of both parties.  At least with highly paid or wealthy participants, the value of the unavailable/restricted asset is still taken into account, which means that some other asset must be divided disproportionately.  Not that proportionate division is sacred, but my Econ 101 class tried to convince me that individuals were always better of by having a choice about allocation of resources.