QDRO Procedures: Compliant WIth ERISA?

Below is an excerpt from some form QDRO Procedures (Relius), which is part of a Retirement Plan. I am trying to understand how this provision is compliant with ERISA:

Quote

1. Suspension of Participant distributions or loans. If the Plan Administrator is on notice (verbal or written) regarding a pending domestic relations action (e.g., a divorce) and has a reasonable belief the participant's account may become subject to a QDRO, the Plan Administrator may suspend processing the participant's distribution or loan requests pending resolution.
2. Removing hold on the account. After placing a hold on the account, the Plan Administrator should notify the participant of the hold on the account. In order to remove the hold, the Plan Administrator should request the Participant to provide written confirmation that a court will not issue a QDRO with respect to the account; such as a property settlement agreement awarding the entire account to the Participant.

Below are the some of the problems that I see with this provision. Am I missing something?
 

1. Freezing a Participant’s Account Based on Mere Knowledge of a Divorce (Without a DRO)
•    ERISA’s QDRO Rules (ERISA § 206(d)(3)): ERISA’s anti-alienation provisions generally prohibit plans from restricting a participant’s rights to their benefits unless a valid DRO is received and under review for qualification as a QDRO.
•    DOL Advisory Opinion 2002-03A: The Department of Labor (DOL) has stated that a plan administrator may suspend distributions only when there is a pending domestic relations order that is being reviewed to determine whether it qualifies as a QDRO.
•    ERISA and DOL Guidance: Under ERISA § 206(d)(3) and Internal Revenue Code § 414(p), a plan administrator may place a temporary hold on distributions IF there is notice of a pending domestic relations order (DRO) that could become a qualified domestic relations order (QDRO).
•    The phrase "on notice (verbal or written)" is problematic. While a plan administrator may place a hold upon receipt of a DRO, simply having a "reasonable belief" that an account may be subject to a QDRO (without an actual DRO) could be seen as an impermissible restriction on a participant’s rights.
•    DOL guidance (Advisory Opinion 2002-03A) suggests that a temporary hold is allowed only if there is an actual pending domestic relations order and it is being reviewed for qualification as a QDRO.

2. Placing a Hold Based on "Reasonable Belief" That the Account "May Be" Subject to a DRO
•    Allows a hold solely because the plan hears of a pending divorce, even if no DRO exists. This creates an impermissible restriction on the participant’s rights because ERISA does not authorize a plan to preemptively place a hold based on speculation that a QDRO may be issued.
•    Problems with "Reasonable Belief" Standard:
o    The language allows the Plan Administrator to act based on a subjective belief that the account "may become" subject to a DRO.
o    This exceeds the authority provided under ERISA, as there is no legal basis to restrict a participant’s account based on speculation or indirect information.
o    It also creates potential fiduciary risks, as the administrator might inconsistently apply this standard or unfairly restrict a participant’s access to their benefits.

3. Problems With the Release of the Hold
•    Requiring a participant to provide written confirmation that a court will not issue a QDRO may go beyond ERISA’s requirements.
•    The burden is on the Plan Administrator to determine whether a QDRO exists, not on the participant to prove that a QDRO will not be issued.
•    A participant may not be able to obtain such confirmation, as courts do not typically issue "non-QDRO" determinations.
•    Instead of requiring a participant to provide a property settlement agreement or written confirmation, the Plan Administrator should instead remove the hold after a reasonable time period (e.g., 18 months per ERISA § 206(d)(3)(H)) unless an actual DRO is received.
•    The Plan Administrator could also release the hold if there is written confirmation from both parties that no DRO will be submitted.

In addition, the quoted (1) and (2) have no associated timeframe.

Yes, that procedure language may be "too loose" but note the requirements in #1 are an "and" not an "or" - so there must be notice to the PA that a DRO may be pending AND the PA must reasonably believe that to be the case, which I think such belief would only be an issue/need if notice was given verbally. A best practice would be for procedures to require a written notice. I do not interpret #1 to allow the PA to freeze Joe's or Jane's account because he heard (s)he was getting divorced and instantly thinks there will be a QDRO. Now if one of the litigants or their attorney informs the PA verbally or (preferably) in writing that there is a divorce proceeding and a DRO may be presented then I think a (temporary) freeze is in order. The "reasonable belief" is not the sole criteria here.

Asking a participant to certify in writing that there won't be a QDRO, I see absolutely nothing wrong with that. In the DB admin world, when someone retires and applies to commence benefits they are asked to certify marital status, provide documentation if applicable, and certify that there is no DRO/QDRO on their benefit if divorced. A divorce decree should state if and how retirement benefits are included in a property settlement. The procedure says "written confirmation" and "such as" so that confirmation/certification could be satisfied in a number of ways to the satisfaction of the PA.

These rules are in place to balance a participant's rights while also protecting (soon to be ex-)spouses, in the same spirit that spouses must be the pre-retirement death benefit beneficiary and pension plans require joint and survivor annuities unless duly waived and consented. 

Should those procedures be tightened, probably, but are they blatantly non-compliant with ERISA, I don't think so. But I'm not an attorney, so maybe experienced legal experts out there believe differently. One final thought, document houses like Relius have attorneys that prepare (or at least review) their pre-approved documents so I would think they also do the same for related items like SPD and QDRO procedures.

About such a domestic-relations-order procedure a plan-documents publisher supplies along with its IRS-preapproved documents, the publisher likely does not state that the procedure is consistent with ERISA’s title I generally or even ERISA § 206(d)(3) particularly.

And adopting the publisher’s domestic-relations-order procedure typically is not a condition of a user’s reliance on the IRS’s opinion letter that a preapproved document, if used correctly, could state a plan that in form meets some conditions of Internal Revenue Code § 401(a).

Some fiduciaries might question whether adopting legal advice from a service provider that denies that it provides legal advice meets ERISA § 404(a)(1)(B)’s standard for a fiduciary’s care, skill, prudence, and diligence.

And no matter how serviceable to third persons is the publisher’s lawyer’s advice to her client, the publisher, that advice—even if the advice embedded in a suggested procedure considers general interests of the class of the publisher’s users—can’t consider the particular facts, circumstances, and interests of a particular user.

So, a plan’s administrator might want its lawyer’s or other adviser’s advice about writing the administrator’s domestic-relations-order procedure.

ERISAlaw, you are not alone in wondering that an administrator need not—and, depending on particular facts and circumstances, perhaps should not—segregate any portion of the participant’s account unless the administrator has received an order that is a domestic-relations order. Even then, an administrator need not restrict any more than what would become distributable to an alternate payee if the DRO is a QDRO. And the administrator may end the segregation when the administrator has decided the DRO is not a QDRO. ERISA § 206(d)(3)(H) [unofficially compiled as 29 U.S.C. § 1056(d)(3)(H)] http://uscode.house.gov/view.xhtml?req=(title:29 section:1056 edition:prelim) OR (granuleid:USC-prelim-title29-section1056)&f=treesort&edition=prelim&num=0&jumpTo=true.

Yet, some administrators, preferably with one’s lawyer’s help, evaluate and balance many risks that might come from domestic-relations situations. (I don’t here advocate or describe any view.)

ERISAlaw, if you think a publisher’s draft domestic-relations-order procedure isn’t right for your client, might your client want you to write what you think makes sense?

This is not advice to anyone.

It is my experience that Plan Administrators are loathe to become involved in litigation if they act or fail to act in the best interests of both the Participant and the prospective Alternate Payee.  The owe a fiduciary duty to both.  Attached are a number of Memoranda I have prepared over the years that touch on that relationship and its real world implications.    

Also attached is a form of Notice of Adverse Interest and cover letter I have used many times when there was any possibility that the Participant might take action that would deprive the Alternate Payee of a share of the Participant's D/B or D/C benefits.  Once the Plan has "actual notice", I have never had a Plan Administrator refuse to put a hold on distributions pending an agreement of the parties or an order of the Court.  Holding up a Participants retirement money is a powerful incentive to resolve the issues.

You might be surprised at how often a Participant will fill out an online form that does not require an attestation by a Notary Public and check the box "unmarried".  Is it fraud?  Yes.  But it's also rampant and victimizes the Plan and the prospective Alternate Payee.  "Better safe than sorry" applies.   

I have come to the point where I suggest to all (mostly) Maryland attorneys within the reach of my online voice to send this sort of Notice and letter immediately when a  prospective Alternate Payee walks through the door.  It might be malpractice and a violation of the Rules of Professional Conduct not to do so. 

A delay in having a QDRO entered by the Court and sent to and approved by the Plan can have disastrous consequences.  See my attached Memo on that issue.

Having addressed the issue from a macro perspective, I note that ERISAlaw addresses not only distributions but "loans" from a defined contribution plan.  If that's the case, a few things are noteworthy.  First, a loan from one's D/C plan is not a "loan" in any sense of that word. The Participant is borrowing from himself, paying the "loan" back to himself, and paying interest to himself.  The only real penalty is that the amount of the loan is not a part of his account and will not benefit from interest, dividend, gains, losses or investment experience until it is repaid.  It is more like taking $20 from the cookie jar in the kitchen and putting $21 back a week later.  Plus, the loan is limited to 50% of the vested account balance but not to exceed $50,000.  Furthermore the QDRO will either "include" (disregard) or "exclude" (net out ) the loan in determining the amount or percentage of the account payable to the Alternate Payee.  If the Alternate Payee is entitled to 50%, the most the Alternate Payee has as risk is $25,000 if the loan is "excluded".

The same problem arises if the Participant  tries to take a hardship withdrawal, an in-service withdrawal, or a post-termination withdrawal.  Except for TSP accounts, the law does not require notice to or consent by a spouse to any of these actions.  Once the money has been withdrawn it is unlikely that an Alternate Payee will ever recover their share.  The Participant will roll it into successive IRA accounts in remote locations, or cash it out, pay the taxes and hide it in his brother's business checking account in Vancouver.  Contempt matters not if the Participant never returns to the home state where the court is located.    

David     

Benefits Link Memo.pdf Notice of Adverse Claim-Interest December 5, 2024.pdf Cover Ltr. Notice of Adverse Interest-Claim Dec 5, 2024.pdf CONSEQUENCES OF DELAY 02-14-2025.pdf

Paging @QDROphile...

Care to share your thoughts?

@ERISAlaw have you tried contacting Relius about this?

For what it's worth, it is very common that a court, upon receiving a complaint filed on a divorce case, immediately issues an order binding the participant and spouse to not impair any marital assets, which would include the retirement benefit.  Therefore, in such jurisdictions, taking a distribution from the plan without spousal consent would be contempt of court.  It is not the Plan Administrator's job to enforce that rule, but in my experience many pension practitioners and HR people worry about protecting the rights of the nonparticipant spouse.  If that is your worry, then if you are in a jurisdiction that does the above, worry not!

Having said that, and acknowledging that ERISA grants no rights to a benefit to the spouse or other alternate payee in absence of a QDRO, there is no obligation for a participant to provide its employer with proof of no QDRO.  There's a Supreme Court case that specifically says that having a QDRO just to say "the spouse gets nothing" is inappropriate.  (See Kennedy v. duPont)

Last but not least, i can understand a plan sponsor's lack of desire to get caught up in a "the participant took my money and the court awarded it to me" fight between ex-spouses.  Even if the plan ends up being dismissed from any litigation, there are still legal fees and anguish to expend.  So, IMO, I understand the desire to freeze the account.  There was a case in my youth (sigh! - the truth of age is that I remember the details of the case but not its name) that dealt with the freezing of an account by a plan administrator upon overhearing a discussion between two employees in which one stated he was getting divorced.  The plan administrator froze the participant's account to distributions and investment changes; the participant tried to change investments, was prevented from doing so, and lost money because of it.  He sued for fiduciary breach.  The court, to my recollection, found the plan liable for the loss, but said it didn't rise to the level of a fiduciary breach.  The fault accorded to the Plan was because teh plan had no provision/QDRO policy that provided for the freeze.  I do not remember the court indicating that a freeze was per se impermissible in absence of a QDRO.  So, I'm not sure that a freeze is impermissible if the QDRO procedure provides for it, and it is reasonable, and can be removed without a QDRO showing that the participant spouse gets nothing.

My thought on reacting to knowledge of a pending divorce has been, despite the DOL not making its notice guidance an actual regulation, how far will a participant get going into court saying, "That mean Plan Administrator won't give me my money before my marital settlement is worked out!"

The PA has interpreted this provision as: if the PA hears about a divorce and has a reasonable belief that a participant's account MAY BE subject to a QDRO, then the PA can place an indefinite hold on the participant's account. In other words, in any divorce I suppose it is always within the realm of possibility that a party's account MAY BE subject to a QDRO, so the PA can place a hold on the account.   Obviously, stretches the meaning of “may become subject” beyond reason. A proper reading suggests that a suspension is appropriate only if there is a reasonable belief that a QDRO is likely or imminent—not just a mere possibility. In other words, the PA should have some affirmative indication that a QDRO is being pursued (e.g., court filings, attorney communications that a QDRO will be sought and likely obtained on an account, etc.). 

In fact, here is the statement from the PA: "It appears the retirement assets of both parties are marital assets subject to equitable division by an adjudicating judge in a divorce proceeding. It is quite possible that either parties’ retirement assets could become subject to a QDRO. As such, no distributions should be made to either party until there is a modification to the standing order, or other such direction by the relevant court (e.g., a QDRO), which should specifically address allowing distributions and rollovers from the retirement plan accounts."