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Benefit Freezes in Advance of DRO Qualification


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We as a plan sponsor place a "hold" on a participant's benefits to prevent distributions when we receive notice that a DRO is being drafted.  Our record-keeper freezes benefits for a maximum of 6 months, but we have DROs that are submitted and qualified as long as four YEARS after we first receive notice that a DRO is being drafted.  How many times can we renew a freeze before we give up?  We send model DROs to the parties for their use but we have had changes in recordkeepers and fund lineups and if any of these years-old DROs come in based on obsolete models we are going to have a difficult time complying, not to mention that participants can still manage their investments and may no longer hold the funds they held at the time the DRO was first discussed.  

Our own DRO procedures do not contain a specific time that a hold will be in place.  It just states that the hold will last until the earlier of certain evens occurs--receipt of a DRO, notification that a DRO will not be requested, etc.  I am not sure this is compliant.

Thoughts would be appreciated.

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Your starting point is ill-considered. There is no statutory authority for interfering with participant rights under the plan prior to the receipt of a DRO. I know that the DOL QDRO book suggests this as a possibility, but if the DOL was confident that it was a good and legitimate idea, it should have issued the guidance in a regulation, which could then serve as protection to a fiduciary who could get sued for fiduciary breach for interfering with participant rights.* The fact that you have so many questions about how to administer a pre-DRO hold illustrates how problematic it is. In any case, why make it a plan problem when the problems lie in the domestic relations proceedings?

Although few domestic relations lawyers have figured it out, it is extremely easy to achieve the same early restriction on dispossessing the future alternate payee within the existing framework that requires a domestic relations order before the plan will take any restrictive action.  And if the participant is a bad actor, there should be remedy in the state courts.

This is a subset of a larger set of problems with both domestic relations law and our legal and court system in general. Paying for competent legal help is beyond the means of many folks who need assistance in navigating the complexities of both the law and the delivery system. The plan should not try to solve that bigger problem by undertaking a mission to make sure everything is fair and square at least with respect to the division of retirement benefits. 

*A court that imposed liability for disregarding a participant's investment instructions during a pre-DRO "hold" allowed that maybe the plan could restrict if the written QDRO procedures provided for the restriction. Even if the court were correct, we don't know what such terms would have to cover, and how, to protect the fiduciary. You are asking those questions for good reason.

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Without remarking on what a plan’s procedure should provide or omit:

The statute’s regime does not require segregating any portion of a participant’s benefit until the plan has received a court’s order that is a domestic-relations order.

From that receipt (if the plan absent a QDRO permits the participant to take a distribution), the segregation period is up to 18 months, but ends when the plan’s administrator decides that the order is not a qualified domestic-relations order.

ERISA § 206(d)(3)(G)&(H) https://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

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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We freeze when we receive a draft DRO from an attorney, or a request from an attorney for a model DRO stating their intention to draft and submit a DRO.  We allow participants to exercise all their rights under the plan except for taking a withdrawal.  Is this outside what other employers do?

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16 hours ago, QDROphile said:

Your starting point is ill-considered. There is no statutory authority for interfering with participant rights under the plan prior to the receipt of a DRO. I know that the DOL QDRO book suggests this as a possibility, but if the DOL was confident that it was a good and legitimate idea, it should have issued the guidance in a regulation, which could then serve as protection to a fiduciary who could get sued for fiduciary breach for interfering with participant rights.*

 

A few practical considerations--if a participant is upset with a QDRO hold, the easiest solution for them is to just get the court to sign the QDRO. A state court also may take issue with a plan allowing a participant to drain their account when it was on notice that benefits may shortly become payable to another. I recall one case in which the court did not appreciate a plan making a beneficiary determination and paying death benefits when it knew a former spouse was trying to get a QDRO, notwithstanding the plan's technical compliance with 206(d).

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1. The court could have done something about that while in process of considering and issuing a domestic relations order that wanted to be a QDRO. Lack of imagination and understanding on the part of the lawyers and the court is the problem.

2. That is what preemption is all about,  especially when there are state courts means to prevent the undesired action within the ERISA 206(d) framework. The plan is not the appropriate target of disaffection.

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8 minutes ago, David Schultz said:

It isn't the plan's place to intervene; the court can do that.  The plan's duty is to follow its terms and provide benefits to participants, not to protect either party in a divorce proceeding.

My belief is that such freezes are an operational failure (not acting within the plan terms) and potentially a fiduciary breach.  I'd tread carefully (or preferably not at all).

This is the answer!

 

 

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I can only speak from the perspective of an attorney who has been involved in the preparation of pension and retirement orders for the past 37 years.  There are a number of factors in play.

1.  In most cases the most valuable assets owned by the family unit are the equity in the marital home and their pension and retirement assets.  You cannot treat them lightly.  An Alternate Payee's loss of benefits can be financially catastrophic.  

2. Most lawyers, and I do mean MOST, have no idea of the complexity if this area of law as applied to the vary narrowly focused question:  "How to I make sure my Alternate Payee client receives the proper share of the Participant's benefits."   They are, for the most part, ineducable.  

3. Most of the judges in my State have had minimal experience as family lawyers.  They have been prosecutors or criminal defense lawyers, personal injury lawyers, or even real estate, corporate, tax or administrative lawyers.  As competent as these lawyers may be, they don't understand family law, and the nuances are entirely lost on them.  

4.  I advise my attorney colleagues to have the QDRO's prepared, approved by the parties, and ready to initial and sign at the same time they sign the Marital Settlement Agreement ("MSA"), and then present it to the court at the final hearing and get the certified copy in the mail to the Plan Administrator ASAP.  Even before that happens, I suggest that at the earliest possible moment they send a "Notice of Adverse Interest/Claim" to every Plan Administration they can identify, the purpose of which is to give them "actual notice" that a QDRO is or will be on the way. 

5. Plan Administrators have a fiduciary duty toward both Participants and Alternate Payees.  See 29 U.S.C. § 1104.  29 U.S. Code § 1002(8) defines "beneficiary" as follows: "(8)The term “beneficiary” means a person designated by a participant, or by the terms of an employee benefit plan, who is or may become entitled to a benefit thereunder.  See 29 USC 1132(c) for penalties imposed upon a Plan Administrator for failure to provide information to a Participant or a Beneficiary.  Pursuant to 29 USC 1132(a)(1)(B) a Participant or an Alternate Payee (who is classified as a beneficiary), can sue "to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan".  29 USC 1132(e)(1) states that: 
        "(e)Jurisdiction:  (1)Except for actions under subsection (a)(1)(B) of this section, the district courts of the United States shall have exclusive jurisdiction of civil actions under this subchapter brought by the Secretary or by a participant, beneficiary, fiduciary, or any person referred to in section 1021(f)(1) of this title. State courts of competent jurisdiction and district courts of the United States shall have concurrent jurisdiction of actions under paragraphs (1)(B) and (7) of subsection (a) of this section."  

6.  What does all of this mean?  If you are a Plan Administrator and receive "actual notice" that a DRO is coming your way, you attorney will counsel you to put a freeze on the Participant's benefits until the matter is resolved by the parties or by the state court.  Failing to implement a freeze may get you involved in a lawsuit that you may very well lose.   I have seen this happen at least 100 times.  Defined benefit plans will not commence the payments of benefits to a retiree.  401(k) plans will not permit loans, or hardship withdrawals, or in-service withdrawals or post termination withdrawals.  

7.  It is a rare case that a Participant is happy about paying pension or retirement benefits to an Alternate Payee.  One of the ways to avoid may some of all of such benefits is to DELAY the entry of the QDRO by any means possible.  See attached a Memo I recently prepared recounting the consequences of delay.  I would welcome anyone with additional scenarios that I may have missed. 

DSG  
 

CONSEQUENCES OF DELAY 04-15-24.pdf

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N.B.  The ability of a court to impose sanctions for contempt requires that the Participant be physically in the state.  If the Participant quits his job and takes a taxable distribution of every dime in his 401(k) and moves to a cabin in the hills of Wyoming after first having deposited his 401(k) into a dummy corporation created by his brother in Vancouver, and never returns to the state where the divorce was litigated, I can promise you that the Alternate Payee will NEVER get her share. 

N.B.  Participants regularly wipe out their former spouse's survivor annuity benefits by simple expedient of remarrying and then retiring before the QDRO has been approved by the Plan.  Read Hopkins v. AT&T Global Information Solutions, 105 F.3d 153 (USCA 4th Cir. 1997), and Rivers v. Central and South West Corporation, 186 F.3d 681 (United States Court of Appeals, 5th Cir. 1999).  

N.B.  The suggestion the court is going to enter a hurry-up QDRO or an injunction aimed at the Plan - a non-party to the divorce litigation - would only be made by those of you who have not actually practiced on my side of the street.  It is true that the law does not provide any immediate methods of protecting a prospective Alternate Payee.  So, people like me have had to come up with creative workarounds, some of which include not so subtle threats and use of the phrase "at your peril".  

I, for one, would be interesting in ways that I can assure that the legitimate intentions of the parties or the court will prevail.  If you as a Plan Administrator have "actual notice" that a suit is pending and that a QDRO has been requested by a spouse and you don't protect the rights of the prospective Alternate Payee, you do so at your peril. 

David 

 

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fmsnc:

While I disagree with your interpretation of some of the authority you cited, and some of your analysis, I don’t disagree with the importance and sensitivity of the subject. I also do not disagree with your assessment of the domestic relations courts and domestic relations bar to be able to deal with retirement benefits properly, which puts retirement plan fiduciaries in a difficult position. I usually work on the plan side, trying to reach a responsible position that protects the plan fiduciary without watching the parties drown in a whirlpool. Unfortunately, most plans do not have the sophistication or desire to put much thought into these matters.

You did identify a practical solution that is within the grasp of the average domestic relations lawyer, whether or not the lawyer knows why it is a solution. I alluded to certain solutions earlier in the thread without explaining them. If you sent my plan client the Notice you described, or a California Joinder Order (sorry, I must spit here at that travesty), which has the same function, I would advise the client to send you back a notice of receipt of a domestic relations order with the explanation that the plan will determine whether or not that order is qualified under the plan’s QDRO Procedures. That would have the effect of a “hold” for a reasonable amount of time, with the hope that people will then get busy and send a real domestic relations order that could qualify. The plan would take its time. That the Notice does not really resemble a domestic relations order does not bother me because plans are entitled to be ignorant of state domestic relations law. Unless the participant argues to the plan that the. Notice is not a domestic relations order, everything is cool and froody for a while. This keeps the plan within the statutory QDRO legal framework and its own procedures, so we do not have the fiduciary breaching any plan terms or written policies or procedures of the plan. 

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I am happy to see that there is such a diversity of views here; now I don't feel so bad about not knowing the best way to handle this stuff.

Here is the fact pattern which prompted my original question.  In May of 2020 we received a draft DRO from the AP's attorney.  We placed a hold on the participant's account which lapsed after 6 months and was not renewed.  We heard nothing until this week when we received a new draft for review.  We have instituted a new freeze which prevents distributions for the time being (RMDs are not an issue), although all other rights and features remain available.  We have other DROs that have been pending for years--some drafts have been reviewed three times and we still have not received a final for approval and it surprises me that the parties would let such an important issue drag on for so long.

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Such an excellent discussion of a very practical topic on which, as far as I know, there is very little law. My take on this issue when I have had to advise clients is that while ERISA and the DOL's guidance unfortunately does not provide protection to a plan administrator that wants to do the right thing (i.e., hold up a distribution when it has notice that a QDRO will be coming), such that a participant who has the right to take a distribution has a good case on paper that the plan should pay him or her, how practical is that lawsuit actually? It's an ERISA claim for benefits, so the most the plan has at stake is the benefit amount, and that's not really at risk because the plan is not paying it to anyone, but rather simply holding on to it until the state court has decided whether and how it should be divied. The issue is only the timing of the payment. So, a participant who, for whatever the reason, wants to take a large distribution that would drain their account before the nonparticipant spouse can get a QDRO would have to hire a lawyer to go to court under ERISA and claim that the plan's delay in paying the benefit was a violation of ERISA. Best case scenario for the participant is they win that lawsuit and the plan pays the benefit. I doubt the plan would have to pay attorney's fees. But by that time the nonparticipant spouse will have had months of notice of what the participant is trying to do and the QDRO will probably have been served anyway. In other words, the participant's lawsuit seems more like a hypothetical than a realistic scenario. (Of course, I am excluding here a situation where the nonparticipant spouse is acting unreasonably, e.g. making an unrealistic claim regarding the benefit and slow-walking the QDRO process.) So, while the law on its face is against the plan that wants to delay the distribution, I think the law in practical effect poses little risk for the plan.

Luke Bailey

Senior Counsel

Clark Hill PLC

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

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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"Infinite are the arguments of the mages." This discourse has been fascinating and educational, and reinforces my opinion (not that it needed reinforcing) that plan sponsors should seek competent ERISA counsel for so many things(and they rarely do)! I've seen a couple live to regret it. 

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About a paucity of courts’ decisions:

Does anyone know of a Federal court’s written opinion that faults a plan’s administrator, when it had notice to expect a domestic-relations order but before the administrator received an order,

—for not protecting a prospective alternate payee from the participant’s act?

—for denying or delaying a participant’s claim because the administrator sought to protect a prospective alternate payee’s interest?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Let’s thank QDROphile.

Some points we get from that decision include these:

The plan’s written procedure called for a hold only “upon receipt of a domestic relations order [and] while the issue of whether the domestic relations order is qualified is being determined[.]”

Under “an unwritten practice [the administrator] would place a hold on Plan participants’ accounts once [the administrator] received confirmation from both parties to a divorce proceeding that (1) the divorce was final or a DRO was being sought, (2) the Plan would receive a QDRO soon[,] and (3) Plan assets would be a source of the QDRO payment.”

The court rejected the administrator’s argument that the written procedure governed only what to do after the administrator has received a domestic-relations order.

The court rejected the administrator’s argument that the unwritten practice was an interpretation of the written procedure.

“[T]he [unwritten] practice is inconsistent with the written QDRO procedures.”

“[T]he Amoco Plan’s informal hold practice violated the requirements of section 206(d)(3)(G)(ii) of ERISA[.]”

“[T]he plaintiff is entitled to recover from the Plan [the losses that resulted from failing to follow the participant’s investment directions delivered after the administrator applied its informal hold].”

One sentence of dictum might be argued to suggest that ERISA does not preclude providing a hold before the administrator has received a domestic relations order if that hold is expressly provided by the written procedure. But whatever that ambiguous sentence might mean, it was unnecessary to the decision and so is no part of any precedent.

Schoonmaker v. Employee Savings Plan of Amoco Corp., 987 F.2d 410, 16 Empl. Benefits Cas. (BL) 1646 (7th Cir. Mar. 1, 1993).

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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1 hour ago, Peter Gulia said:

Schoonmaker v. Employee Savings Plan of Amoco Corp., 987 F.2d 410, 16 Empl. Benefits Cas. (BL) 1646 (7th Cir. Mar. 1, 1993)

So in this case the "hold" that the plan administrator put on the account was not just on distributions, but investment changes. The participant had Amoco stock in his account and was barred from selling it, resulting in an investment loss. He won the litigation.

Query whether in a typical 401(k) where investments are in mutual funds and the hold is only on distributions, not investment changes, by participant, you would have any compensable loss.

Luke Bailey

Senior Counsel

Clark Hill PLC

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

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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Your observations are right.

That Amoco ignored Schoonmaker’s direction to redeem his interest in employer securities might have resulted in his account’s loss. Also, ignoring a direction to redeem shares or units of a US large-cap stock fund might have resulted in a somewhat similar loss. Depending on which measures and days one looks to, US large-cap stocks had around a 30% drop in mid-October 1987, when Amoco had applied a hold.

After reading Schoonmaker (if not earlier), many practitioners—whether working for plans’ sponsors and administrators, or for service providers—wrote or edited plan-administration procedures, including QDRO procedures, to make clear that, even if the plan puts a waiting-for-a-DRO hold on a participant’s right to a distribution, a participant continues to direct investment. To do otherwise would make the plan’s administrator the fiduciary responsible for investing the participant’s account.

If a participant remains responsible to direct investment for her account, such a participant’s loss is not about her account’s investments. Rather, it’s a delay of one’s opportunity to take a distribution or loan the plan would provide absent the QDRO procedure’s (or some other) hold.

For reasons you’ve mentioned and some more, few participants might pursue that claim. And for those who pursue it, the harm from the delay might be slight, or might be difficult to prove.

All that observed, legal, practical, and economic restraints on a liability exposure to affected participants is only one of many factors an administrator might consider in designing its QDRO procedure.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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How about the other direction:

Does anyone know of a Federal court’s written opinion that faults a plan’s administrator for not protecting a prospective alternate payee from the participant’s act?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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