QDRO amount exceeds the account balance

I received a QDRO that was filed by the court with judge's signature. The QDRO assigns $140,000 to the alternate payee as of Sep-19-2024, adjusted for investment gains and losses through the date funds are segregated.

The problem is the participant's account balance as of the assignment date was only $125,000. Can we assume the QDRO's intent was to assign 100% of the participant's account balance as of the assignment date?

And there has been a single $1,500 deposit for the participant since the assignment date, which is not subject to the QDRO and will remain in the participants' account +/- any gain or loss.

Correct.  In such a case, a prudent PA would approve the qualification with the condition that the amount payable cannot exceed the amount available; the PA might (probably?) require the draft DRO be amended to include that phrasing.  Otherwise, the PA does not care how much is awarded to the AP.

Or, some administrators might not interpret such an order to provide something it does not “clearly specify.” One might find that an order is not a QDRO, and send denial letters to the participant, proposed alternate payee, and each’s representative.

I recognize there are difficult tradeoffs between insisting on a tidy administration and guarding a plan’s administration from wasting time and money because of less-than-perfect domestic-relations practices. These are choices for discretionary plan administration. And the choices might involve risk and expense management.

This is not advice to anyone.

I am in David Rigby's camp. I would qualify the order subject to the interpretation that the assignment is $125,000 as of the assignment date, and then adjusted, but any contributions after the assignment date are disregarded. This allows the affected parties to assess the mistake. If they decide it is the best/intended outcome with respect to the plan benefits, it minimizes the fallout for everyone. If one or both are dissatisfied when apprised of the mistake, then they appeal the interpretation to the administrator and get a ruling that the order is not qualified because the condition for qualification (correct interpretation of the language) fails.

A checklist is fine, and a good approach to QDRO administration, but knowledge plus good judgment serve fiduciaries better. 

1.  I assume that you are using the term "QDRO" because the Plan in you case is an ERISA qualified plan, and that you are not using "QDRO" as a generic name for other sort of plan, e.g. an EDRO, RBCO, COAP, DRO, RBO, IRA, etc.

2.  I assume that the purpose of the QDRO is (i) to transfer marital property from one party to the other incident to a divorce; and that it is not being used (ii) to  collect child support arrears.  The tax consequences respect to "(ii)" will make impact the manner in which the payments can be made inasmuch as the Participant is deemed to be the distributee of money paid for child support (see below) and  income taxes must be withheld from the account before the amount is balance of the account is transferred to the Alternate Payee on behalf of the child (sometimes referred to as the Alternate Recipients), and this must be done by grossing up the amount to be transferred.  For example if the court order allocates $100,000 to the former spouse for child support, that must be grossed up to  $125,000 to permit the Plan to withhold 20%($25,000) for income taxes. [Note 10% may be the minimum percentage that must be withheld.]  If the account only has $100,000 you must withhold 20% = $80,000, so the amount does not enough to pay $100,000. 

N.B.  All Agreements by the parties or Orders of the Court  entered after January 1, 2019, will have no tax consequences to either party for the payment/receipt  of alimony, so the analysis above re: child support will apply to alimony as well.  

3.  Some Plans, like Warner Brothers-Discovery provide,

"If the Participant’s vested liquid balance is insufficient to fund the Alternate Payee’s award, the Order will be non- qualified."  The is common for most Plan where Fidelity is the Third Party Administrator. 

4.  Other plans provide:  

" On the date that the Plan Administrator segregates Alternate Payee’s assigned share of the benefits as set forth above, to the extent there are not sufficient assets in Participant’s account(s)/investment funds to satisfy the award of benefits to Alternate Payee, then this order shall be interpreted as an award of One Hundred Percent (100%) of Participant’s Total Vested Account Balance under the Plan as of such segregation date.

5.  Another option:  Reject the QDRO and let the parties or the judge figure out how the Plan is supposed to withhold taxes on Plan account money that must be distributed in full.   

6.  Yet one more option:   Pay out 100% of the Plan account to the Alternate Payee and issue a 1099-R to the Participant, and don't worry about withholding on the theory that the alternate recipient are not receiving taxable retirement benefits and is not a party to the tax consequences imposed on the Participant and should not have the amount ordered reduced.   See IRC 402(e)(1)(A) - "For purposes of subsection (a) and section 72, an alternate payee who is the spouse or former spouse of the participant shall be treated as the distributee of any distribution or payment made to the alternate payee under a qualified domestic relations order (as defined in section 414(p))".  The spouse or former spouse is NOT the distributee of payments made to the child c/o a parent. And this is consistent with the law that makes child support not taxable to the recipient parent.   The same would be true in the case of a Participant in pay status with respect to a defined benefit plan.

7. You can always file an interpleader and deposit the money into the Registry of the court and let the judge decide.  

If AJC is a Plan Administrator, you Plan Documents should address this potential issue. 

DSG

Generally, I think interpleaders are a cop-out on the part of fiduciaries. They should make decisions as best as the can, and the unhappy parties can appeal and give the benefit of their knowledge in the process. Ultimately the court is there on either path.

DSG, some Federal courts have criticized an ERISA-governed plan’s administrator’s use of an interpleader when the arguable uncertainties could have been resolved using the plan’s claims procedure or QDRO procedure.

As C.B. Zeller pointed out, the QDRO from the court had not yet been qualified by the Plan Administrator. I spoke to the participant today, who stated the $140,000 figure was calculated based on something other than the participant's account balance.

The Plan Administrator rejected its qualification today because the Order would require the Plan to provide benefits greater than the benefits available to the participant without the QDRO. Simple as that.

Both parties' lawyers were notified. An amended QRDO will be prepared and filed for the $125,000 amount that was available as of the assignment date.

Simple.  And inefficient. Does the plan charge for review of domestic relations orders?

I’m curious: Of those plan administrators, TPAs, and recordkeepers that furnish a model QDRO to a domestic-relations litigant’s attorney:

Does your model order include, for a segregation specified as an amount rather than as a percentage, text setting the alternate payee’s subaccount as the specified amount or 100% of the participant’s account, whichever is less?