Child Support Judgment Against a Participant’s 401(k) Account

[415 Limit]

Has anyone dealt with a child support order or judgment directed to a 401(k) plan?

The participant reportedly owes approximately $90,000 but currently has only about $1,500 in safe harbor contributions in the plan. The plan’s financial advisor has indicated that the order must be honored. Is that correct?

• Must the order satisfy the requirements of a QDRO before any plan assets can be paid?

• Can the plan be required to make an immediate payment if the participant does not otherwise have a distributable event?

• Could the order apply to future contributions, or only to the participant’s current account balance?

• Are there any particular procedures or notices the plan administrator should follow upon receiving this type of order?

Any input or experience with a similar situation would be greatly appreciated.  Thanks!

[Peter Gulia]

As ERISA defines a “domestic relations order”, a DRO includes an order that “relates to the provision of child support.” ERISA § 206(d)(3)(B)(ii)(I), 29 U.S.C. § 1056(d)(3)(B)(ii)(I); see also I.R.C. (26 U.S.C.) § 414(p)(1)(B)(i).

A carefully written DRO might meet the elements and conditions for a qualified domestic relations order.

As ever, RTFD—Read The Fabulous Documents.

Although ERISA § 206(d)(3) sets up some of what the plan must provide, there also are some QDRO-related provisions a plan may include or omit. For example, some plans allow a QDRO distribution even when the participant has no right to a distribution and has not reached ERISA § 206(d)(3)(E)(ii)’s earliest retirement age; but some plans preclude a QDRO distribution if the participant has not reached that earliest retirement age.

A QDRO cannot “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). If a plan’s only form of distribution is a nonperiodic payment, an alternate payee would need a distinct court order for each payment, specifying the amount of the payment. But ERISA § 206(d)(3) doesn’t directly preclude a State’s or Native American Indian tribe’s court from issuing as many DROs as it takes to keep consuming the participant’s account balances, including balances that result from continuing contributions.

An order that specifies a payment more than the participant’s account balance is not a QDRO.

The plan’s administrator ought to follow its QDRO procedure and claims procedure (except to the extent a procedure would have the administrator do something contrary to the plan, or violating ERISA’s title I).

If the plan’s administrator engaged a recordkeeper’s or other service provider’s DRO-review service, check whether the service includes or excludes an order designed to collect child support. If the court order names an alternate payee other than the participant’s spouse or former spouse, check whether the DRO-review includes or excludes such an order.

Communications to the participant, to a would-be alternate payee, and to an attorney or other recognized representative of either should be as the QDRO and claims procedures call for.

If the plan’s administrator finds that a submitted order is not a QDRO, the administrator might want to use extra care to make the denial communication procedurally perfect.

None of this is advice to anyone.

[ESOP Guy]

Who is this demand coming from?  If it is a state child welfare agency trying to collect back child support see if you can get a notice and read it carefully.  It will mostly use language that is very scary but when read carefully admits they can't force a plan to pay.  It has been my understanding that a state agency can't make a qualified plan pay absent of a QDRO.  I have seen several that when read carefully it was clear it was a clever bluff.  

I would make the client get an attorney to give an opinion but there is a good chance the plan can't pay legally.  But most likely the TPA isn't qualified to make that legal call. 

And yes I have see plans ignore a state agency on this and nothing happen after the plan attorney said they didn't think the state could make the plan pay the benefit and nothing happen.