QDRO Hardship for Alternate Payee

[Guest Cindy Lambert]

If a QDRO is established for the alternate payee of a participant in a 401(k) plan, does the participant's "amount available amount for hardship" from Salary Deferrals get prorated so that the Alternate Payee now acquires the right to a hardship distribution?

[KIP KRAUS]

I would check the plan document. Most plans I’ve been involved with do not allow hardship withdrawals to non-active employee participants.

The alternative, if allowed by the plan document is to have the alternate payee take a total distribution and use what ever amount is needed for the hardship and roll the remaining amount over to an IRA. I believe that the net tax effect will be the same as taking a hardship withdrawal assuming that the AP is not age 591/2 or has medical expenses in excess of the IRS adjusted gross income percentage.

[MWeddell]

1) Check the plan document. A lot of 401(k) plans will give the alternate payee the right to request a complete distribution once the order has been accepted as a QDRO. That would make your question about whether a partial withdrawal due to hardship becomes available a moot point for most alternate payees.

2) A carefully drafted QDRO could give the hardship withdrawal right to the alternate payee and prorate or divide up in another way the hardship amount available between the participant and the alternate payee. This does not constitute giving the alternate payee an option that the participant does not have and hence is likely permissible. The problem will be convincing the plan administrator to honor the QDRO if the withdrawal is not expressly authorized in the plan document. I agree with Kip Kraus that most plan documents will not expressly authorize this.

[KIP KRAUS]

MWeddell

I’m not sure I understand your second point relative to a carefully drafted QDRO giving the AP the right to a hardship withdrawal. If the plan document does not allow hardship withdrawals to non-active plan participants a QDRO cannot force such an issue on the plan, right?

[QDROphile]

At the risk of perpetuating a dcussion with many implicit points that beg for clarification, I don't think a right available to an alternate payee need be expressly authorized in the plan document. For example, if the plan provides lump sum and installment payment distribution options, alternate payees may receive installments even if the plan does not state that alternate payees are eligible for installments. The plan provides for installments, so the QDRO does not require the plan to provide for a type or form of benefit or other option not otherwise provided under the plan.

I doubt that many plans state that APs are ineligible for hardship distributions, but maybe that would not be a bad idea.

Hardship withdrawals have features that may ultimately justify a different treatment for alternate payees, but I would feel comfortable arguing that the participant can get a hardship withdrawal, therefore the AP can. The plan is not asked to do anything that it is otherwise unprepared to do. Remember, plans are not required to have any provisions for QDROs, so it will be difficult to refuse something on the basis that the plan is designed to do things only for participants or active participant (loans are a different matter for more complex reasons).

I am not clear on the concept of nonactive participants being ineligible for hardship withdrawals, but let's take that at face value. The argument then becomes that an AP under a QDRO affectng a nonactive participant can't get a withdrawal because the participant can't. But an AP of an active participant still can get a withdrawal.

I don't know what to make of the ERISA provision that says APs are treated as beneficiaries. Does that mean they can't get what a participant can if the plan expressly provides more limited rights to beneficiaries? The tax code might have a different view.

In the end, I don't know the answer, but it is plausible that APs are entitled to hardship distributions. I completely agree that it is better to avoid the uncertainty by allowing APs the right to receive distributions from defined contribution plans whether or not the participant is eligble. Then you don't have to get into the secondary issue of the QDRO designating which participant accounts and funds are awarded to whom, as correctly observed by MWeddell.

[MWeddell]

I agree with QDROphile's post above, but will try to clarify paragraph (2) from my prior post in case QDROphile didn't already do so for me!

Suppose that a 401(k) plan document allows hardship withdrawals only to "active participants" and that the plan document defines "active participants" in a way that clearly excludes alternate payees. Former participants are allowed lump sum distributions, but not partial withdrawals. The plan does not provide for complete distributions to alternate payees as soon as feasible after an order has been accepted as a QDRO, as discussed in (1) of my prior posting, and in fact defines "former participants" in a way that doesn't allow the alternate payee to get a lump sum distribution while the participant is still employed. A domestic relations order is submitted in a divorce action when the participant is still actively employed by the plan sponsor. Further suppose that everyone involved agrees that an order meets the IRC 414(p) definition of a QDRO except it also expressly says "The alternate payee shall be entitled to any other form of benefit provided under the plan to similarly situated participants who are not alternate payees."

In that hypothetical, a plan administrator looking only at the plan document would deny any hardship withdrawal request from the alternate payee. However, the alternate payee (or his/her attorney) should argue that the sentence quoted above from the QDRO requires that valid hardship withdrawal requests from the alternate payee be honored. Furthermore, the AP's attorney would argue that the quoted sentence does not cause the order to fail to be a QDRO and in particular does not violate IRC 414(p)(3)(A).

Although the situation is admittedly unclear, my opinion is that the AP is probably entitled to a hardship withdrawal (although it's foggy whether it'd have to be the AP's hardship or the participant's hardship if that makes a difference). In other words, I think that the AP has a statutory right to have the QDRO enforced once it satisfies IRC 414(p). If the order is properly drafted and if the plan gives hardship withdrawals to other participants, then it must allow hardship withdrawals to alternate payees. The main problem the AP (or his/her attorney) has is convincing the plan administrator of this argument.

[Guest Cindy Lambert]

Thank you all for your responses. For the sake of minimizing "what if's", assume that the Plan does allow for hardships to "all participants", not just "active participants". Also, the Plan does not allow for in-service distributions until a distributable event occurs, with the exception of hardships, so the QDRO does not allow for immediate distribution. Since the participant is still employed, the AP cannot get a lump sum. (I think that this is the situation with this plan. Excuse my lack of certainty, but I'm actually posing my question on behalf of a situation that has recently arisen with a coworker.) Therefore, if I understand correctly, based on your collective responses, an alternate payee would have the same rights to a hardship, correct? Supposing this is the case, the next question is what basis would you use to determine how much of their QDRO is available for distribution? Would you prorate the amount that the participant had available? For example, if the participant had $10,000 available for hardship, and the account was split 50/50 for the QDRO, would the participant and AP each now have only $5,000 available for hardship?

I'm probably making this question difficult, but I've been in the practice 14 years and haven't seen this come up. I don't work with QDRO's on a daily basis, but those I have seen have never had language regarding how to calculate/"transfer" hardship accumulators.

Thanks in advance for your ongoing discussion!

[MWeddell]

If the QDRO is silent about how to split hardship amount available, I would also guess that the recordkeeper would also pro-rate this amount.

[KIP KRAUS]

My last word on this. To my knowledge there is no regulation that requires a plan to allow a non-actively employed participant(a former employee participant of the plan) a loan or hardship withdrawal. Therefore, if the plan does not allow loans or hardship withdrawals to these types of participants then, in my opinion the plan cannot be forced by QDRO or otherwise to allow a non-actively employed AP to recieve these options regardless of whether his/her former spouse is actively employed or not. The AP's status in the plan, in my opinion has nothing to do with the former spouses, it stands alone, and the AP cannot have the same status as employees in the plan.

'

[MWeddell]

I'm not sure I understand the last sentence of your post, Kip, but agree with the gist of your post. In my hypothetical, it's only because the plan allows 401(k) hardship withdrawals to other participants that I conclude it must do so for the alternate payee as well.

[KIP KRAUS]

MWeddell

I guess it’s just a matter of semantics. All I’m saying is that an AP cannot have the same advantages as an employee who is working for the company who is sponsoring the 410(k) plan, and a QDRO cannot require a plan to give the AP those advantages. Most APs have never been employee/participants in the plan that they have been assigned AP status. Therefore they cannot by QDRO be given the plan advantages as an employee/participant. I don’t know if this clears up my position, be it wrong or right, but I hope so.

[QDROphile]

In response to Ms. Lambert's follow-up question, the plan's written QDRO procedures should have default provisions for dealing with these questions if the QDRO does not specify.

Let's suppose that only elective deferral amounts are available for hardship withdrawal. Matching and profit sharing amounts are not. The QDRO could assign 50% of the participant's balance as of date XX to the alternate payee and further could direct that the alternate payee's benefit be constructed first from elective deferrals. Let's say that the participant's account is more than 50% composed of elective deferrals. The APs benefit is 100% elective deferrals and the AP has access through a hardship distribution (assuming that APs can get hardship distributions). The participant's elective deferral account is reduced by that amount and the participant has a much smaller balance for future hardship withdrawals.

But the drafter of the QDRO is as ignorant as the plan administrator who does not have adequate QDRO procedures. So the the QDRO does not say anything about how to construct the APs benefit. Adequate QDRO procedures would say something like the following:

Unless the QDRO provides otherwise, the alternate payee's subaccount will be created by pro rata withdrawals from all of the participant's accounts and investment funds other than a loan accounnt.

The plan administrator would then prorate, so that 50% of the participant's elective deferrals as of date XX would go to the AP's subaccount and be available for hardship withdrawal.

So go out and amend your written QDRO procedures to provide some rule for dealing with the situation. It does not have to be pro rata, but you need a rule for this and other purposes, such as deciding which investments to charge. Even if you decide that APs cannot have hardship withdrawals, you need an ordering rule or policy.

[KIP KRAUS]

QDROphile

Maybe I’m not getting all of what you are intending to say here, so forgive me if I misinterpreted anything you said, but I think that any definitions of participant or rules related to distributions should be in the plan document. The cart comes before the horse. The plan document first and QDRO qualifying procedures follow the plan document provisions.

[MWeddell]

Kip,

I disagree with your 10:50 a.m. post, but considering this is a gray area and that I've tried clarifying my position as best I can, I'm inclined to move on. My long post earlier in this thread gave an example where I believe a well-drafted QDRO could give the alternate payee a right that the plan document would have denied.

The Qualified Domestic Relations Order Answer Book (by Panel Publishing, including the 2000 Supplement) doesn't help us much in resolving our disagreement. When answering whether a QDRO can "require that an alternate payee be entitled to receive a hardship withdrawal ... if the plan does not include such a provision," it concludes that "the answer is not clear." Q 1:9, 5:24.

-- Michael Weddell

[Guest Cindy Lambert]

Interesting discussion you folks have going here. Should we just tell the client "no"? (just kidding) It's tempting to have them defer to the AP's attorney for proper documentation, but they'd just turn around and call us for advice.

This truly does seem to be a gray matter, and the sad part is, upon reviewing the AP's QDRO account, we're not talking about a huge amount of money. But being the conscientious hard-working anxious-to-learn TPA thats we are, we want to do the right thing....hmmm...what is the right thing?

[MWeddell]

Cindy,

Yes, I guess we didn't give you a clear answer. In your situation, I say allow the alternate payee to have a hardship withdrawal and prorate the amount available.

The plan allows hardship withdrawals to "all participants" you said earlier which probably could be reasonably interpreted to include alternate payees. Doing so avoids the gray area where the QDRO conflicts with the plan document.

There was some disagreement about the best method for splitting the hardship amount available. However, the disagreement seemed to be how throughly and in what forum the proration method should be specified. It seemed like all of the posters suggested prorating the hardship amount available when the order was silent on the issue.

[QDROphile]

I agree that QDRO issues could get more attention in plan documents, but I don't think you would want to choke the plan document with all the details. Our written QDRO Procedures are about 14 pages long, covering both DC and DB plans. Our plan documents say that QDROs will be determined and adminstered in accordance with the written procedures adopted by the plan adminstrator. The plans have a few other key provisions, such as allowing APs to get distributions in DC plans even if the participant is ineligible.

This approach is similar to an approach that is often used with plan loans. The plan document does not have all the gory details. The loan procedures are in a separate administrative document, and can be adjusted without a formal plan amendment.

I also agree that the plan document controls, so the written procedures should not contravene the plan document. But the procedures wll provide a lot of embellishment. Were it not so, we would have express requirements for QDRO provisions in plan documents. We do not. ERISA says that plans shall have written procedures, not that procedures shall be in the plan document. The new Summary Plan Description regulations say the the QDRO procedures either have to be summarized in the SPD or the the SPD has to say that a copy of the procedures is available on request. That implies (i) that the plan document does not have to say every relevant thing about QDROs (otherwise it would have had to be in the SPD anyway without mention in the regulations) and (ii) the procedures are so important that they have to be mentioned in the SPD and made available.

Also, when someone is looking for the the procedures to assist in drafting an intelligent domestic relations order, you don't want to have to give them the entire plan document. Give them the separate written procedures, that is all they care about.

[KIP KRAUS]

Everyone seems to be coming from his/her individual area of interest regarding this issue, and I guess that’s good for discussion, but not so conclusive for Cindy. The longer the posts get, the less my original position has been swayed.

My advice goes back to me original post, if there is any doubt tell the AP no on the hardship withdrawal and explain that a total distribution can accomplish the same thing.

You may be surprised if they accept that position, and if they don't you go back to the drawing board. Good luck.

[QDROphile]

Given the complexities of the issue in the abstract and the importance of the actual plan provisions, QDRO provisions and other facts, I don't think Cindy should be getting her advice from people who choose to participate on a bulletin board. Good leads, food for thought, confirmation of what one knows, yes. Answers to act on, not usually.

While the plan usually has the upper hand in QDRO matters and as a practical matter, the other players usually cave in to what the plan dictates (usually it is not worth pushing it), the Department of Labor is disposed to presume that the plan is the bad guy and that the alternate payee needs and deserves protection. Trust me on this. I have participated on panels about QDROs that included DOL representatives. The DOL hears mostly from frustrated alternate payees and lots of plans don't behave properly. This is the DOL view of life because of its sample space. I think the DOL is somewhat twisted and occasionally wrong in QDRO issues, but you don't take them on lightly. Also remember that ERISA provides for attorneys fees, so you are always betting you are right. Perhaps you want to bet advisedly.

Although plan fiduciaries look to administrative service providers to answer most questions, determination of qualification and adminstration of domestic relations orders is a fiduciary function. A service provider that does not want to become a fiduciary or who does not feel competent to advise the fiduciary should decline and suggest that the fiduciary seek other advice. As one can see from the discussion among knowledgable commentators, this is not an easily resolved issue.

Also, neither the service provider not the fiduciary should be advising the participant or alternate payee. Very dangerous to get caught up with them. Get good written documents and give them out and then react in the determination process to what they come up with. Don't engage them. Among other things, it is a black hole for use of time.

[KIP KRAUS]

Thanks for the philosophical comments. I know I needed it.

Maybe using the term advice on my part was inappropriate. I usually just give my point of view as simply that, my point of view. On the other hand, of course, if advice is free one is always free to take it or leave it, and it doesn’t hurt my feelings.

[Guest Cindy Lambert]

Originally posted by KIP KRAUS

My advice goes back to me original post, if there is any doubt tell the AP no on the hardship withdrawal and explain that a total distribution can accomplish the same thing.

In my infinitesimal knowledge of QDRO's, this statement confuses me (actually..I got that way a few postings ago).  It has always been my understanding that if a plan doesn't allow for distributions until a distributable event occurs (i.e. termination), then the AP could not get a distribution until the "ex" terminated and was eligible to be paid.  Otherwise, if the AP got a total distribution, you would not be following the provisions of the Plan.  Granted my area of specialty is not getting down in the trenches with QDRO's, so have I misunderstood?

[Guest Cindy Lambert]

By the way, many thanks for the thought-provoking replies to this question. I have not made any decisions, and the good news is that I don't have to, since I was inquiring on someone else's behalf (and came close to inciting a riot). The various positions on the subject are interesting, and it's obvious that we all different (dangerous)levels of understanding. The worst part of Plan Administration is gray matter vs. gray area.