QDRO – Our 401k Plan was joined in divorce case, but no DRO exists yet

[Guest Bud]

Our plan has been joined (in California) in a divorce case. We haven’t received an order. We have received a pleading on joinder. The attorney for the spouse (the alternate payee) says we are on notice of a claim for a portion of the participant’s account and participant cannot receive a distribution or a hardship withdrawal. Can they do that without submitting a domestic relations order for our review? If we ignore the notice and distribute benefits if the participant, for example, terminates service, the attorney says our plan will have to pay the spouse’s interest anyway. Is he right?

[Guest boberlander]

He sounds right to me.

[Guest Bud]

If he's right, how long do you think the joinder can prevent a distribution? The couple could argue about this for months or years. They may forget about it and never submit a DRO.

[Guest boberlander]

I apologize - let me have another shot at an answer.

You should follow the terms of the plan.

If the plan says that a "hold" should be put on the account after the receipt of the DRO, that's when it should happen.

If it says it should be put on the account before the DRO is received, but after the plan administrator is notified, then it should happen at that time.

To address your concern about timing and waiting - I'm not sure. There is an 18-month period recognized as a time limit to determine if the order is qualified. Without the order though, that obviously will not apply.

I await other responses.

[MoJo]

I think the plan is on notice about who benefit payments may be made to, and hence it processes distributions at its own peril. The notice would terminate at the time of a final decree of divorce with or without a DRO, and hence it isn't an indefinate issue.

If the plan is concerned, the plan, as a defendant in the lawsuit, could motion the court for instruction, and force the issue.

[Guest boberlander]

I amended my first reply, that essentially aggreed with Mojo, after reading in The Pension Answer Book that a court ruled that a DRO hold "violated ERISA because it was contrary to the plan's written procedures."

In the case cited, the hold was placed on the account before receipt of the DRO; the written procedures said the hold should come after receipt.

So, it seems that not making the distribution, in contravention of the plan document and written DRO procedures, may not be the best route to follow.

[MoJo]

Its really a no win situation - a damned if you do, damned if you don't. While ERISA preemption may be a nice argument to fall back on, and makes for neat text in an Answer Book, my experience is that the local judges don't really give a hoot. The law is what they say it is. When in doubt, interplead the funds into court, seeking a judicial declaration of who is entitled to the benefits. That forces the issue.

p.s. Having worked for a bank, serving as trustee and service provider, it was our policy to hold distributions in those cases where we were named in the complaint (under authority of the "as soon as administratively feasible" language that appears in almost all documents) under the theory that it was administratively impossible to determine to whom the benefit should be paid.

[Kirk Maldonado]

I agree with MoJo. (I practice in California, so I (unfortunately) see this issue quite frequently.)

[QDROphile]

California domestic relations procedure is a disaster for retirement plans. One way to approach the problem is to treat the joinder as a domestic relations order (not totally farfetched, but unconventional), which causes suspension of payments until you resolve qualification. This bridges the plan into the 18 month rule (which most people misunderstand)and provides a basis for delay or action as appropriate under the circumstances. And read Trustees of the Director's Guild v. Tise for guidance. And read the dissent in Stewart v. Thorpe Holding for the antidote to the assinine majority opinion in that case(sorry, just had to throw that last gratuitous sentence in there, but the majority opinion deserves as much bad publicity as it can get).

[Guest]

It would appear that one way for the Plan/Trust to get out of the case is to pay the entire benefit for the Participant into the Court. This is only true if the Participant is eligible for a distribution.

You could also speed up the process by moving to remove to federal court.