QDRO specifies dollar amount

[doombuggy]

I have a QDRO for a plan and it has awarded a dollar amount to the former spouse Alternate Payee.  

The date of segregation is 8/2/2024.

Is the Alternate Payee entitled to gains on that amount of assignment from the date of segregation until now?  I thought the answer was yes, but a co-worker felt that this might not be necessary.

Anyone confirm that Alternate Payee is only entitled to the flat dollar amount?

Note the plan's assets are held at Hancock, so we will move the amount over to an account for the Alt Payee until she fills out a distribution form.  Right now, I am trying to determine how much to move and split it over his 3 sources.

[Bill Presson]

It all depends on what the QDRO says. 

[Peter Gulia]

The plan’s administrator might first evaluate whether the order is a qualified domestic relations order.

To be a QDRO, an order must “clearly specif[y] . . . the amount . . . to be paid by the plan to each such alternate payee, or the manner in which such amount . . . is to be determined[.]”

If an order sets an amount but also mentions a past “date of segregation” and does so without stating that the alternate payee neither benefits from nor is burdened by investment change after that date, that sets up an ambiguity.

Or that two intelligent people read the order and are uncertain about what it provides or doesn’t might suggest an ambiguity.

If the plan’s administrator has already instructed you that it found the order is a QDRO, require the administrator to instruct you about what amount to set aside for the alternate payee. If you use discretion and either the participant or the might-be alternate payee understands the order differently than you see it, you invite blowback and a liability exposure (even if small).

This is not advice to anyone.

[RatherBeGolfing]

1 hour ago, Bill Presson said:

It all depends on what the QDRO says. 

This is the answer. And it is impossible for us to guess if earnings should be considered without knowing what the DRO says...

[QDROphile]

If the order specifies a dollar amount, but says nothing about earnings, it is reasonable to establish the alternate payee's subaccount with the specified dollar amount as of the date the plan administrator gets around to establishing the subaccount. If the order states a date of "segregation", a reasonable QDRO administrator (the relevant fiduciary, which might be the plan administrator) might still interpret the order to provide for a specified amount whenever the subaccount is established. As observed by others, the statement of a date injects ambiguity because the fiduciary will recognize those words as having a meaning associated with investment earnings. The notice of qualification will state the fiduciary's interpretation by stating whether or no earnings will be awarded. That allows the parties to appeal (to the plan, not the court) if they don't agree. That might be the smoothest way to proceed. If they appeal, the plan will have to disqualify the order for failure to specify the amount to be paid (unless the parties agree in the appeal on the implicit award of earnings and how to calculate them) and then everyone is back in the same position as suggested by not qualifying the order in the first place. In any event, the relevant fiduciary is the one to interpret the order and should express that interpretation (including an interpretation the the order is ambiguous) in the notice of qualification or not qualification. It is always nice for the written QDRO Procedures to state that, as a condition of qualification, the order must make an express statement about the award of earnings. Responsible drafters of DROs will read the QDRO Procedures, but responsible drafters of DROs will also know better than to omit specific terms about earnings. The QDRO Procedures might also say that a DRO will be presumed to recognize time value of money and that absent an overriding instruction, the plan's usual administrative procedures* for calculating earnings on an award to an AP will apply. Again, that might be a quicker route to the intended outcome than immediate disqualification. The plan has at least a chance that it will choose what the parties intended (if the parties actually thought about it). And, sadly, even if the Plan's default is not what the parties intended, everyone may be so relieved to get on with life that they won't appeal, thus saving the Plan from further rounds of dealing with incompetent drafters. Obviously, I am used to looking out mostly for the plan. It is dangerous for a plan to try to look out for the competing interests of individuals in a divorce.

*Which might include such other things as (1) creating the AP's subaccount with a proportionate share of each of the participant's investment accounts, or (2) investing the AP's subaccount initially in the Plan's default investment, or (3) stating any unvested balances will be allocated between the participant and the AP.

 

[doombuggy]

Thank you.  I will figure out the gains.

[QDROphile]

I read Paragraph 8(ii) to provide that investment earnings and losses do not accrue on the alternate payee’s specified dollar amount until the subaccount is actually created and the amount credited to the sub account (and allocated among the investment options, if that is what the plan usually does). This approach is very easy for the plan to administer because the earnings and losses take care of themselves and do not have to be calculated as part of establishing the alternate payee’s interest. 

[RatherBeGolfing]

57 minutes ago, QDROphile said:

I read Paragraph 8(ii) to provide that investment earnings and losses do not accrue on the alternate payee’s specified dollar amount until the subaccount is actually created and the amount credited to the sub account (and allocated among the investment options, if that is what the plan usually does). This approach is very easy for the plan to administer because the earnings and losses take care of themselves and do not have to be calculated as part of establishing the alternate payee’s interest. 

That is how I read 8(ii) as well.

[fmsinc]

Let's talk about the LAW.  It will require some reading.  See the attached Memo addresses cases from all over the US.  In Maryland gains and losses and investment experience are implicit since out law authorizes the Court to award an OWNERSHIP INTEREST in a pension or retirement plan and treats the Participant as a trustee for use of benefit of the Alternate Payee.  Get back to me with any questions.  

Gains, Losses, Investment Exp - 09-29-2022.pdf

[QDROphile]

Sorry, I did not read the entire monograph. What I did read focuses on an important matter that is not relevant to the question at hand in this thread. The latter part of the monograph may address the question of a specified dollar amount, so my apologies if I have unnecessarily jumped on the first part without acknowledging that the monograph gets around to what is relevant here. The monograph begins by focus on when the alternate payee’s interest is determined, usually as a function of some date relevant to the divorce, such as when the divorce is determined to be final. The examples relate to determining a percentage of the participants account as of that key date. That amount, with the presumption of crediting earnings and losses until the “segregation” date, which I have referred to as the date that the plan actually creates the alternate payees subaccount, needs to be preserved through the interim time before implementation under the plan to be able to give effect to the words of the domestic relations order and the intended economic value of what was awarded.
 

An award of a specified dollar amount is outside of the considerations described in the beginning of the monograph. The specified amount is determined without respect to any particular historical date in our case. The order itself instructs the plan administrator to simply use that specified amount when the administrator establishes the subaccount, and then give credit for earnings and losses after that. That is a clear statement of the intent of the court and the parties, which should be the determining factor in implementation of the order, not some state law legal presumption that involves a determination of amount that is dependent on a particular date rather than a specified amount. And, while abstract notions of fairness would suggest that determining the value as of the divorce date is the “correct” approach, it is rational for the parties to pick a specified amount, that the alternate payee is entitled to receive as of the time the amount is established under the plan, without respect to what the financial markets have done between the date of divorce and the time the plan gets around to establishing the sub account and making the amount available for distribution. The parties may have intended to protect the alternate payee against losses, at the possible expense of foregoing interim gains. That is for the parties to decide or the court to determine if there is some contest. It is certainly improper for a plan fiduciary to try to look into the purposes and intents of a domestic relations order and override the terms of the order (citations omitted, but available, and that’s THE LAW).

[Peter Gulia]

ERISA’s supersedure of States’ laws makes it unnecessary for an employee-benefit plan’s administrator to know, or even consider, any State’s law.

Section 514(b)(7)’s limited exception regarding a qualified domestic relations order or qualified medical child support order might call a plan’s administrator to read an order’s text, but one need not know the State’s or Tribe’s law underlying the order.

ERISA § 206(d)(3) calls a plan’s administrator to follow only a QDRO that “clearly specifies” the necessary information and instructions.

An order does not “clearly specify” if the plan’s administrator cannot determine the amount to pay to, or set aside for, the alternate payee from the order’s text alone.

[fmsinc]

My Gains and Losses Memo addresses gains and losses in multiple contexts.  The underlying concept is the same.  The Alternate Payee's share should be adjusted from the valuation date to the date of transfer the Alternate Payee.  That date of transfer can be to a separate account in the same plan for the Alternate Payee's benefit, or a rollover to an IRA or other eligible retirement account, or a direct taxable distribution.  The QDRO can address a percentage or a dollar amount and both can be adjusted for gains, losses and investment experience. It is a two edged sword. 

So you don't think that this concept of "ownership interest" is unique to Maryland and to the cases I have cited, take a look at every case in the US that has addressed 5 CFR 838.237(b)(3).   There is some duplication from the Gains and Losses Memo.  

There is a malpractice case pending in Maryland where the the parties agreed to a lump sum and did not address gains and losses.  The attorney for the Alternate Payee decided to add gains and losses and nobody noticed.  That decision, coupled with inexplicable delay by the attorney in getting a QDRO entered by the Court and sending a certified copy to the Plan Administrator, resulted in an over $300,000 loss of value of the Alternate Payee's share.  

Many plans have default provisions that either adjust for gains and losses, or not, unless otherwise set forth in the QDRO. 

Peter speaks to the obligation of the Plan Administrator to consider state law.  He is right.  I have often found it necessary to send this letter to the Plan Administrator: 

 I want to bring the following matters to your attention. 

        1. The QDRO I prepared was approved by both parties.
        2. The QDRO was signed by the Court and a certified copy forwarded to you.
        3. By law you act as a fiduciary with respect to both parties. ERISA § 404(a)(1) and ERISA § 409.
    I would like to bring to your attention a number of relevant authorities that deal with your ability as the Plan Administrator to “look behind” a QDRO that has been submitted to you.
    A 1992 ERISA Advisory Opinion suggests a plan’s administrator need not review the correctness of a State court’s decision about whether a person is, under a State’s domestic-relations law, the participant’s spouse, former spouse, child, or “other dependent”. See ERISA Adv. Op. 92-17A (Aug. 21, 1992) (A plan’s administrator may treat as a participant’s former spouse for QDRO purposes a person the State court decided was never the participant’s spouse.)-
https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/a
dvisory-opinions/1992-17a.pdf.
    Brown v. Continental Airlines, Inc., 647 F.3d 221, 223 (5th Cir. 2011) (“[ERISA § 206(d)(3)(D)(I)] does not authorize an administrator to consider or investigate the subjective intentions or good faith underlying a divorce.”) -
https://casetext.com/case/brown-v-continental-airlines-inc.
    See also Blue v. UAL Corp., 160 F.3d 383, 385 (7th Cir. 1998) (“ERISA does not require, or even permit, a [retirement plan] to look beneath the surface of the order. Compliance with a QDRO is obligatory[.]”) -
https://casetext.com/case/blue-v-ual-corporation#p385.
    And see Matthew v. E.I. Dupont, 3rd Cir. 2017, citing Blue and Brown: “Additionally, DuPont's interpretation subverts the deference owed to state-court QDROs by ERISA plan administrators. Our sister circuits have explained that "ERISA does not require, or even permit, a pension fund to look beneath the surface of the order." Brown v. Cont'l Airlines, Inc., 647 F.3d 221,227 (5th Cir. 2011) (citations omitted); see also Blue, 160 F.3d at 385. Here, the terms of the QDRO support Matthews' interpretation.”

But that does not relieve the attorneys who prepare QDROs to abide by the laws in force in their state.  The Plan cannot look at a plan that says ownership interest and gains and losses and decide to ignore it. 

David 

 

OWNERSHIP INTEREST 5 CFR 838.237(b)(3).pdf

[Peter Gulia]

I didn’t suggest that an ERISA-governed plan’s administrator has a duty or obligation to consider a State’s law (other than a court’s domestic-relations order submitted to the plan’s administrator).

Rather: “ERISA’s supersedure of States’ laws makes it unnecessary for an employee-benefit plan’s administrator to know, or even consider, any State’s law.”

And “Section 514(b)(7)’s limited exception regarding a qualified domestic relations order or qualified medical child support order might call a plan’s administrator to read an order’s text, but one need not know the State’s or Tribe’s law underlying the order.”