Jump to content

QDRO distribution from multiple sources


Recommended Posts

Say a QDRO specifies a lump sum of "X." Participant has several sources - deferrals, match, Roth, Pre-tax, etc.

QDRO and plan are silent on the issue of which source(s) from which the funds would be distributed. My answer would be proportionately from all sources - but does the Participant or Plan Administrator have the right to then dictate the source(s) from which the distribution is made? For example, all from Roth, or none from Roth, etc.?

Thanks.

Link to comment
Share on other sites

I can't imagine a Plan Administrator would ever want to take on that burden of picking. 

As for the participant if the document doesn't give them the power to pick I would say "no".   I have never seen a document that gives such power to a participant. 

I can't cite anything but that would be my answer every time. 

Link to comment
Share on other sites

This may be an inadequately drafted DRO if it does not address the division of the after-tax basis in the participant's account. Has it already been accepted as a QDRO by the plan administrator?

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

Link to comment
Share on other sites

Determining if a DRO is qualified is one of the duties of the plan administrator. If the DRO does not contain enough information to divide the participant's benefit, then it might not be qualified.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

Link to comment
Share on other sites

Beyond checking that a domestic-relations order “clearly specifies” enough details that one can follow the order without discretion, a plan’s administrator also might check whether the order’s division is one the recordkeeper would implement within the recordkeeper’s obligation under its service agreement.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Link to comment
Share on other sites

Assuming a plan administrator has not escaped the problem by furnishing its preferred form of court order, what do BenefitsLink people think about which is the better or worse way to handle an account division’s allocation problem:

Include in the plan administrator’s QDRO procedure defaults for how the alternate payee’s award is allocated between non-Roth and Roth subaccounts?

This way risks that a participant or an alternate payee is unhappy with the default allocation, and claims the administrator somehow breached its responsibility.  Even if such a claim is meritless, it’s an expense to respond to the claim.

Insist that a court order specify all details for all allocations, including between non-Roth and Roth subaccounts?

This way often incurs expenses to respond to inept domestic-relations lawyers.

What do you think: which path is more painful, or more expensive?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Link to comment
Share on other sites

59 minutes ago, Peter Gulia said:

Assuming a plan administrator has not escaped the problem by furnishing its preferred form of court order, what do BenefitsLink people think about which is the better or worse way to handle an account division’s allocation problem:

Include in the plan administrator’s QDRO procedure defaults for how the alternate payee’s award is allocated between non-Roth and Roth subaccounts?

This way risks that a participant or an alternate payee is unhappy with the default allocation, and claims the administrator somehow breached its responsibility.  Even if such a claim is meritless, it’s an expense to respond to the claim.

Insist that a court order specify all details for all allocations, including between non-Roth and Roth subaccounts?

This way often incurs expenses to respond to inept domestic-relations lawyers.

What do you think: which path is more painful, or more expensive?

I think an administrator is far more likely to come across a silent order than a situation where the parties do not want a pro rata allocation.  As a result, I think it's easiest to include a default rule (pro rata) in the Procedures.  Assuming it can be administered, the Procedures can include a caveat of "unless a QDRO provides otherwise."  I'd argue there are other similar default rules that should be identified in the Procedures but wouldn't necessarily be needed in a QDRO (e.g., timing for segregation, how the account will be initially invested if no election is made, what gains and losses encompasses, etc.). I can only recall only one or two situations where a participant has sought a different allocation than the default pro rata after a QDRO was preliminarily approved.  If that were to happen, the participant could just object to the determination letter (assuming the plan gives the parties an opportunity to do so) and then get a new QDRO that clearly articulated the allocation. Otherwise, by taking a hard-line approach and requiring an order to specify the allocation, I'd imagine the administrator will have to do a lot of additional back and forth and the parties will have to undergo additional time and expense to get a new order (which ultimately will probably allocate pro rata).

Link to comment
Share on other sites

Peter, I also vote for default. And in Belgarath's actual case, since there is no actual policy in place now, I would send the participant and alternate payee a letter saying that the plan would apply a pro rata allocation unless they wanted to resubmit a modified QDRO that might provide otherwise.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

Link to comment
Share on other sites

What about sources that are not 100% vested?

Do the funds that go tot he AP come from both vested and non-vested portions of the account?

For example, PS only.  Participant has $10,000 and is 50% vested.  DRO calls for 50% of vested account balance.  After the transfer, is the participant left with:

A) $2,500 vested and $5,000 unvested?

B) $3,750 vested and $3,750 unvested?

Choice A would be much harder to record keep, IMO.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

Link to comment
Share on other sites

8 hours ago, BG5150 said:

What about sources that are not 100% vested?

Do the funds that go tot he AP come from both vested and non-vested portions of the account?

For example, PS only.  Participant has $10,000 and is 50% vested.  DRO calls for 50% of vested account balance.  After the transfer, is the participant left with:

A) $2,500 vested and $5,000 unvested?

B) $3,750 vested and $3,750 unvested?

Choice A would be much harder to record keep, IMO.

I think it has to be A.

Link to comment
Share on other sites

9 hours ago, BG5150 said:

What about sources that are not 100% vested?

Do the funds that go tot he AP come from both vested and non-vested portions of the account?

For example, PS only.  Participant has $10,000 and is 50% vested.  DRO calls for 50% of vested account balance.  After the transfer, is the participant left with:

A) $2,500 vested and $5,000 unvested?

B) $3,750 vested and $3,750 unvested?

Choice A would be much harder to record keep, IMO.

I don't see how it can be B.

Think of it this way.   If the participant quit the day after the AP got paid choice B would mean you pay him $3,750.  That would mean between the AP and participant they would be paid $6,250.   I assume you agree the AP gets $2,500 under your fact set.    The total vested was $5,000 now they are getting paid more then that.  So getting the QDRO just hurt the rest of the participants by reducing the amount of forf that are available to them for fees or reallocation.....

 

Link to comment
Share on other sites

It would be A because you cannot award an AP an unvested benefit in a QDRO.  So AP gets $2500 and P has $2500 vested and $5k unvested.  However, the QDRO could say AP gets 50% of the total (so $5k) and that would be paid from the vested source only leaving P $5k all unvested subject to future vesting.  While that's not necessarily fair you could also draft one QDRO awarding AP 50% of vested ($2.5k) and reserve jurisdiction over unvested and later on enter a supplemental QDRO to capture the additional amount due AP once that part of the account vests.  

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...