ESOP Model Order Needed

Is anyone willing to send me a copy of a model ESOP QDRO? 

In Maryland where I practice the law with respect to vested and non-vested 401(a) benefits seem to be an out of step with the manner in which ESOP Administrators are willing the alocate the benefits to the Alternate Payee. 

My email is marylandmediator@gmail.com

Thanks.  

David

Just curious: Does the plan your client might submit a DRO to furnish a suggested form?

Many plans’ administrators and their service providers furnish, at least to lawyers, a “model” form for an order likelier to get the plan’s QDRO approval.

While employee-benefits lawyers differ on whether a plan should furnish a model, some suggest it as a way to help protect a plan’s administration from difficulties and expenses that would result from responding to judges and lawyers less knowledgeable and less capable than you. Likewise, many service providers furnish a model to lower the operating expenses of a DRO-review service.

While you wouldn’t limit your work to following a plan’s model, sometimes reading the particular plan’s model reveals what kinds of divisions or payment commands likely would result in a denial that an order is a QDRO.

If you don’t find a model from the plan or by other means, consider Wolters Kluwer’s VitalLaw, Thomson/West’s Practical Law, or Lexis’ Practice Advisor.

This is not advice to anyone.

This is probably no help because (1) you already know to ask for a plan’s written QDRO procedures, and (2) most QDRO procedures are perfunctory. Well written QDRO procedures provide a guide to drafting. This is particularly true with respect to how the plan would like to see administration of vesting of an account subject to a QDRO. If the QDRO procedures do not specify, I think it is fair to ask the QDRO administrator for an explanation. Unfortunately, I do not know an effective way of laying shame on an administrator for deficient procedures and communication. You could inflict some pain by dragging the plan through claims procedures with the ultimate threat of a lawsuit, but that is cost prohibitive on your clients’ side as well.

Under claims procedures, the plan has to give an explanation about its negative decision on qualification (and the interpretation that goes with it). 

Peter and QDROphile:

Yes, I have received model QDROs from a dozen ESOP administrators.  But none  address the allocation of unvested shares awarded/deposited into the trust during the marriage that will not vest until after the divorce.  In Maryland, if we were talking about unvested  stock options or non-qualified deferred compensation plans (neither of which are enforceable by a QDRO) the non-vested portion would be allocated by the parties or by the court as follows: 

“If, as and when the Participant’s unvested ESOP shares vest, the Plan with transfer to the Alternate Payee a sum computed by taking the value of newly vested stock computed [N.B. once a year valuation is another issue that was not addressed in https://www.congress.gov/bill/119th-congress/senate-bill/2403/text] and multiply the amount thus obtained by a fraction, the numerator of which is equal to the number of whole months of the Participant’s employment from the date of the grant of the aforesaid unvested stock until the date of entry of the Judgment of Absolute Divorce, and the denominator of which is equal to the number of whole months of the Participant’s employment from the date of the grant of the aforesaid unvested stock until the date of vesting of such unvested stock.”  

This may be a tempest in a teapot since vesting will occur within 6 years and that means that the duration of the marriage will be rather short and the amount in the trust, vested or not, may be meager - but maybe not. Under Section 415 of the Internal Revenue Code, yearly allocations ("annual additions") to individual employee accounts for the ESOP and any other defined contribution plan, such as a 401(k), cannot exceed the lesser of 100% of their compensation or a dollar limit that is indexed for inflation ($72,000 as of 2026).  I have seen divorcing couples fight over, and the court order the preparation of a QDRO to transfer, as little as $5,000. 

I am working on a Memo and will send that along when it's ready for prime time, maybe today. It's titled "ESOP V. STOCK OPTION PLANS,     VALUATION, VESTING, INTERPOLATION, QDROS, AGREEMENTS, MONETARY AWARDS"....a real page turner sure to win the Pulitzer. 

David

Some individual-account retirement plans lack complexities like providing delays on when a participant’s accruals become nonforfeitable. And many plans are designed to allow an immediate QDRO distribution no matter that the participant yet has no currently exercisable right to a distribution and is young. These provisions and daily measures of accrued individual-account balances have resulted in many domestic-relations lawyers getting less experience in thinking about how to divide or value rights.

But dividing rights under an ESOP, especially if the employer securities are untraded (and more so if the corporation has a power to redeem shares regarding an individual who no longer is an employee), involves understanding rights and conditions under the plan.

About how divorcing spouses deal with an employee stock ownership plan:

Have you considered writing a DRO that would deliberately separate division and payment functions?

An order’s division of rights in an ESOP might be grounded on the division of marital property the litigants negotiate or the domestic-relations court finds. A DRO’s division might set over to the alternate payee’s segregated account a portion of ESOP rights that includes rights that have not yet become nonforfeitable.

An order might allow its alternate payee choices, subject to the plan’s provisions, about how quickly or slowly the alternate payee claims distributions from the alternate payee’s segregated account. An alternate payee might wait for a transferred ESOP right to become nonforfeitable. And, if even a vested right is not immediately distributable, an alternate payee might wait until the participant attains the ERISA § 206(d)(3) earliest retirement age.

This is not advice to anyone.

I don't think in all the decades I have worked on ESOPs I have seen a QDRO that splits non-vested shares/balances.   In this regard they look like any other DC plan QDRO the QDRO give the method to split the vested balance only.   In fact I am not even sure how this would work.  What if the participant leaves before they become fully vested a year later you would have to make sure the Alt Payee forf also.  

Sorry, maybe I am not getting it but this sounds like this split might be over thought.  

Just as a participant’s account can include rights that are not yet nonforfeitable, an alternate payee’s account might include rights not yet nonforfeitable.

(I recognize that a plan administrator’s service provider might lack software to apply a forfeiture to an alternate payee’s segregated account. One might need to use other methods.)

I recognize the idea is unwelcome and impractical for everyone involved.

I mention the idea only because some divorcing spouses and their advisers encounter difficulty in negotiating a value regarding not-yet-vested ESOP rights, which involve at least two layers of contingencies.

If an alternate payee’s segregated account gets some still-forfeitable rights, the alternate payee bears the risk that the participant severs from employment before those rights become vested. (The alternate payee bears a further risk if a right becomes vested but is not distributable.)

I don’t doubt that most people negotiate a division that provides an alternate payee’s portion only from nonforfeitable rights, maybe leaving forfeitable rights with the participant.

But now I’m curious: Ignoring ESOPs and considering readily divisible daily-valued account balances, what division do divorcing spouses negotiate when the participant’s account has only forfeitable balances? (For example, imagine the participant made no elective deferral, the employer made nonelective contributions, those are burdened by five-year cliff vesting, and neither of the divorcing spouses wants to wait until the vesting condition is met.)