DRO assigns part of APs benefits to Participant

[RatherBeGolfing]

This is a new one for me.

Short DRO incorporates the much longer Marital Settlement Agreement by reference.  The MSA awards 50% of the funds accrued from date of marriage to date of the divorce, adjusted for earnings (marital portion).  The MSA further states that Participant shall receive $20,000 from APs share of the marital portion of Participant's retirement account by virtue of the same DRO that divides the marital portion.

I may be grumpy due to the lazy DRO which made me go through the MSA to find the relevant language, but this doesn't sound right to me.  If AP has agreed to pay P $20,000 from APs share of the marital portion, P can use the MSA to enforce that agreement.  It shouldn't be the plans responsibility to pay P from P's retirement account using a DRO that assigns the benefit to the AP  but with part of the award payable to P.

Am I missing something here?

[david rigby]

DRO directs payment to Participant? Not to AP? 

[CuseFan]

To me this appears like an attempt by P to get an impermissible in-service distribution from plan by incorporating into the DRO. Remember all those Delta pilot sham divorces attempting to get pension lump sums with QDROs? 

Personally, I think the plan pays the AP - and the AP incurs the tax liability and the plan's obligation is fulfilled. What the AP does with those funds to comply or not comply with the rest of the property settlement agreement is of no concern to the plan IMHO.

[RatherBeGolfing]

37 minutes ago, david rigby said:

DRO directs payment to Participant? Not to AP? 

DRO itself does not contain any of the relevant information, instead it just incorporates the marital settlement agreement by reference.   The MSA states that the AP is entitled to 50% of the marital portion of Ps account.  It also says that through the DRO, P is to receive $20,000 from APs share of the marital portion.  In this case, the AP will be entitled to something like $50,000 from Ps retirement account, but per the MSA, the DRO is supposed to both divide the marital portion and direct payment of $20,000 of APs share to the participant.  

[RatherBeGolfing]

28 minutes ago, CuseFan said:

Personally, I think the plan pays the AP - and the AP incurs the tax liability and the plan's obligation is fulfilled. What the AP does with those funds to comply or not comply with the rest of the property settlement agreement is of no concern to the plan IMHO.

Yea that is what I'm thinking too, but at this point Im annoyed at the whoever drafted the lazy DRO (and the judge for signing it...), so I think I make them fix it first.

[Peter Gulia]

A QDRO does not order a payment to a participant.

A qualified domestic relations order “creates or recognizes the existence of an alternate payee’s right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under a plan[.]” ERISA § 206(d)(3)(B)(i)(I).

Likewise, ERISA § 206(d)(3)(C)(ii) refers to “the amount or percentage of the participant’s benefits to be paid by the plan to each such alternate payee[.]”

Whatever is not assigned to the alternate payee is the participant’s portion of the participant’s benefit, and remains governed by the plan’s terms.

Even without the attempted convoluted provisions, one might justifiably be grumpy about an order that purports to state its command only by incorporating a marital-settlement agreement. An order that merely describes what the divorcing parties agree between them (even if it says, in passive voice, what the alternate payee “shall receive”) is not the same thing as a court’s command that a specified person do (or refrain from doing) a specified thing. Under the statute’s definition of a QDRO, an order can be a QDRO only if the order “clearly specifies” the amount the plan must pay the alternate payee. ERISA § 206(d)(3)(C)(ii).

Once an administrator decides to deny that a submitted order is a QDRO, a good denial letter explains all potential grounds for denying QDRO treatment. The order RatherBeGolfing describes might have more defects. Among them:

Even if the plan’s administrator were to interpret the order as commanding the plan’s payment only to the alternate payee, doing so when the administrator has some reason to know the alternate payee might have some duty or obligation to pay over some amount to the participant could allow the participant to get indirectly a benefit the plan does not provide. A QDRO “does not require a plan to provide any type or form of benefit, or any option, not otherwise provided under the plan[.]” ERISA § 206(d)(3)(D)(i).

http://uscode.house.gov/view.xhtml?req=(title:29%20section:1056%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1056)&f=treesort&edition=prelim&num=0&jumpTo=true

[QDROphile]

I would want to see all the documents, but I will take a different approach for the sake of argument.  I don't know what the "DRO" says, but it appears to carry most of the formalities of section 414(p). The MSA (which is also a "domestic relations order") has the juice, which is the substantive terms of assignment of benefits.  The MSA has a bunch of other stuff, too.  When a "DRO," that by itself does not want to be a QDRO, is incorporated by reference, but has an essential ingredient for qualification, the plan administrator should identify what is the subject of the qualification and what is not (i.e. disregarded).  Many courts have moved toward a simple checklist approach to qualification. If the right stuff is there (and no wrong stuff that that offends the plan design), then the plan has a QDRO.  I don't see the provision for the alternate payee to give the participant funds from "the marital portion of Participant's retirement account" as wrong stuff.  I look at that provision of the MSA as other MSA stuff like "sell the house, divide the proceeds, and then the husband gets an additional $XX from the wife's portion of the house proceeds."  The plan pays no attention to the incorporated provisions that are other MSA stuff that have nothing to do with the assignment of retirement benefits, i.e. the 50% of the marital portion.  The plan does not enforce the provisions that are not essential parts of the QDRO,  Whether or not the AP asks for a distribution and forks $$ over in compliance with the MSA is a matter for the state court.  The plan should be very clear about what the QDRO is, and what is disregarded, and that the plan will not require the AP to take a distribution, and that the plan will pay all proceeds of distribution to the AP. This approach gets the job done at the least cost to the plan and the parties.  The bad drafting upsets me, too.  I also don't like something that veers close to an unpermitted assignment of part of the AP's benefit, but I think if the plan is not involved with the AP disposition of funds, the plan is not implicated.  Also, we just have to get over the sham divorce aspects of "liberating" retirement funds for the participant.  That has been settled and is part of the trend to focus on the qualification checklist and the rest of reality (and the domestic relations implications) be damned.  I opt for practicality. If a particular lawyer is responsible for this and repeats the crappy drafting for other clients affected by the plan, then I opt for discipline and making for a clean order by denying qualification.

[Peter Gulia]

Yup. There often are practical trade-offs about whether a plan’s administrator should treat as if it were a QDRO an order that doesn’t meet the plan’s QDRO provision (especially if the order is one a court likely might find is a QDRO).

In some circumstances, one might balance ERISA § 404(a)(1)(D)’s command to obey the plan’s governing documents with § 404(a)(1)(A)(ii)’s purpose of incurring no more than “reasonable expenses of administering the plan[.]”

While concurring with QDROphile’s observation about what often might be a path of least resistance, lots of factors can affect what’s less or more expensive—for an individual instance, or for the full range of a plan’s (or a service provider’s) domestic-relations matters.

[MoJo]

18 hours ago, RatherBeGolfing said:

Yea that is what I'm thinking too, but at this point Im annoyed at the whoever drafted the lazy DRO (and the judge for signing it...), so I think I make them fix it first.

While the advice here is good (we'd reject for the reasons stated), my guess is that this wasn't lazy, but rather intentional on the part of the participant's attorney - who is waiting for "Mr. Green" to arrive.  In other words, the participant needs to pay their lawyer and the only pool of money may be the plan.....

[CuseFan]

2 hours ago, MoJo said:

In other words, the participant needs to pay their lawyer and the only pool of money may be the plan

I was thinking that as well.

[Belgarath]

Curious as to how the tax reporting on this would be handled. Say account is worth 100k. 50K to the alternate payee. But then the plan pays the participant 20k from the alternate payee's account that was created under the terms of the QDRO. Is the alternate payee taxed on 50k, or 30k? 

[fmsinc]

You have a tax issue.  The AP can elect to take a taxable distribution but under IRC 72(t)(2)(C) there will be no 10% early withdrawal penalty regardless of her age.  The Participant has no ability to avoid the 10% penalty if he is under age 59-1/2.  And if the Participant is still employed by the Plan Sponsor he/she may be be able to make a distribution to himself at all.  He can take out a loan for 50% of the vested balance but not to exceed $50,000, or the plan may have an option for a taxable hardship withdrawal that will also be taxable income to him and, I think, will also be subject to the 10% penalty. 

It looks to me like the Participant is looking to circumvent the ability to take a distribution and the required 10% penalty. 

Last but not least, a QDRO is at instrument created to permit a transfer of pension or retirement assets to a former spouse without running afoul of the antialienation provisions of 26 USC  §401(a)(13)(A).  26 USC §414(p)(1)B)(i) says

"(i) relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of a participant."  

The only way that the Participant can use a QDRO to give money to himself is to transfer it to his ex-wife, let her take a taxable distribution at her (likely lower) marginal tax rate (with no 10% penalty), and they turn it over to him. This is not an uncommon event.  Of course it's not set forth in the QDRO and it may be worded in the underlying Marital Settlement Agreement in a well disguised way.   

Or, it may be possible that the answer is found in the following.   https://youtu.be/zeIsxXDyjlc 

David

 

[Adi]

In case it's helpful, here's a prior post that touches on QDROs for AP accounts:

I agree with others--a plan can pay an AP, and if the AP is a spouse or former spouse, he/she should be taxed on the payments. What they do with that money after the fact is up to them. But I don't see how a QDRO could be accepted that also requires payment to the P.

 

[RatherBeGolfing]

The DRO was rejected as not qualified, with a instructions to re-draft the order to complete the missing parts and clarify that the plan will not pay participant through the QDRO, only the AP.

Thanks everyone.  I appreciate your thoughts and insights.