QDRO ISSUES FROM PLAN SPONSOR S PERSPECTIVE

Transcription

1 QDRO ISSUES FROM PLAN SPONSOR S PERSPECTIVE Stephen M. Goodson, Esq. Keating Muething & Klekamp PLL Cincinnati, OH Nothing in this presentation is intended to be legal advice. Please consult with counsel of your choice with regards to any specific questions you may have Keating Muething & Klekamp PLL. All Rights Reserved. 1

2 INTRODUCTION: REA CHANGES THE FOCUS Pre-REA: anti-assignment rules prohibited assignment of retirement benefits to former spouse IRS focus on anti-alienation violations: Rev. Rul PLR PLR

3 REA CHANGES THE FOCUS Rev. Rul Before Jan 1, 1985: Plan will not lose IRC 401(a) qualification and prohibition on alienation or assignment of benefits not violated due to compliance with court order requiring deductions from benefits of participant in pay status for alimony or support payments Accrued benefits not currently payable to participant may not be attached since participant has no present right to such benefits. PLR Participant retired, fully vested, but not yet in pay status Will payment of pension benefits pursuant to court order for back alimony owed to former spouse violate IRC 401(a)? Since benefits are not currently payable, they can not be attached without adversely effecting qualification and exemption PLR Participant still working, not in pay status at time of divorce and property settlement agreement Rule against assignment or alienation intended to assure that accrued benefits are available for retirement Distribution pursuant to settlement agreement to former spouse violates IRC 401(a) 3

4 REA CHANGES THE FOCUS Post-REA: Congress makes clear with the Retirement Equity Act of 1984 that retirement benefits can be assigned to former spouse if QDRO rules are followed Focus shifts from IRS oversight to administration and procedural compliance 4

5 BY FOLLOWING PLAN AND PROCEDURES The Basics IRC 414(p)(6)(B): each plan shall establish reasonable procedures to determine qualified status of DROs ERISA 206(d)(3)(G)(II): such procedures shall be in writing DOL Reg (j)(1): SPD must describe the plan s QDRO procedures or state that the QDRO procedures can be obtained without charge 5

6 DOL GENERAL RECOMMENDATIONS Adopt procedures to facilitate DRO processing and minimize plan burdens/costs Include in the plan s QDRO procedures a description of steps taken to protect and preserve retirement assets/benefits upon receipt of a DRO 6

7 The Plan receives a DRO what next? IRC 414(p)(6)(A)(ii)/ERISA 206(d)(3)(G)(i)(II) Determine whether the order is a QDRO within a reasonable period of time According to DOL Publication reasonable depends on the specific circumstances in most cases the 18-month segregation period would be unreasonably long 7

8 IRC 414(p)(7)/ERISA 206(d)(3)(H) Pending a determination, make a separate accounting of alternate payee s interest Separate accounting does not require segregation Treatment of benefit payments hinges on determination made during 18-month period 18-month period begins with the date that 1 st payment would be required to be made under the DRO» DOL Publication: 18-month period can not begin before the Plan receives the DRO 8

9 Statutory Determination and Payment Rules: IRC 414(p)(7)(B), (C); ERISA 206(d)(3)(H)(ii), (iii) Order determined qualified within 18-month period pay segregated amount in accordance with order (can be before 18- month expiration) Order determined not qualified or status unresolved within 18- month period pay segregated amounts as if there were no order But see: 1. REA Committee Reports 2. DOL Publication 3. Plan Document and Procedures 9

10 Committee Report for hr if plan administrator determines DRO is defective before expiration of 18- month period, then administrator may delay payment until expiration of 18- month period if administrator has notice of attempts to rectify deficiencies if plan administrator receives notice that a DRO is being sought, administrator may delay payment of benefits for a reasonable period of time DOL Publication regards Committee Report as a clarification of the procedures to be followed during the 18-month segregation period Committee Report for s99-313» Notice of issuance of a stay while appeal is pending is notice that parties are attempting to cure deficiencies» Administrator to honor restraining order prohibiting disposition of participant s benefits pending resolution of DRO dispute 10

11 DOL Publication: Procedures to address rejection and revision, and reduce conflicting claims: Describe the process under the Plan for obtaining review of administrator s determination Establish a process for providing preliminary or interim review Establish a process for postponing final determinations for limited periods to permit correction within 18-month period 11

12 FACT PATTERN DRO entered Feb. 1, 2013 DRO sent to Plan administrator Feb. 10, 2013 Plan administrator rejects DRO Feb. 15, 2013 Participant requests distribution Feb. 16, 2013 Result? Refer to Plan procedures and provisions 12

13 QDRO PROCEDURES CAN ADDRESS: Participant account investment issues Participant distribution issues Treatment of proposed order Treatment of notice of forthcoming order Treatment of revise-and-resubmit Account status on death or retirement of participant Authority of Plan administrator to act: The interpretation and administration of this Order by the plan administrator, and the effect of this Order on the remaining benefits of the Participant, shall be binding on all parties. Remember: Follow Plan procedures and provisions 13

14 FACT PATTERN DRO entered on March 1, 2013 DRO sent to Plan on March 15, 2013 Plan administrator reviews DRO and discovers participant received lump sum on March 14, 2013 Result? Refer to Plan procedures and provisions 14

15 Cases of Interest Weitzman, 2012 U.S.Dist. Lexis (D.Or. 2012) Day, 112 F.Supp.2d 833 (W.D.Wi. 2000) Schoonmaker, 987 F.2d 410 (7 th Cir. 1993) Stewart, 207 F.3d 1143 (9 th Cir. 2000) Singleton, 290 F.Supp.2d 767 (W.D.Ky. 2003) 15

16 Weitzman, 2012 U.S.Dist. Lexis (D.Or. 2012) Nov spouse notified employer of pending dissolution, QDRO restriction flag placed on account June 2007 spouse forwards draft QDRO to Plan» QDRO procedures required 6-month administrative lien on 50% of account upon receipt of draft QDRO July 2007 entire balance distributed to participant; days later employer notifies spouse to revise orders Participant transferred balance to IRA where value plummeted Spouse sought pre-distribution allocation Plan mistakenly distributed account to participant in violation of its own policies Plan can not deny ex-spouse ability to obtain valid DRO claiming its violation of ERISA would wrongly increase benefits payable 16

17 Day, 112 F.Supp.2d 833 (W.D.Wi. 2000) 1993 Plan approves proposed revised QDRO and proceeds to transfer funds to former spouse» Plan rules prohibit transferring funds to former spouse without first receiving a QDRO 1995 Plan is notified QDRO never received court approval, yet Plan fails to address mistake 1997 former spouse submits valid QDRO; Plan denies distribution Plan violated its own rules and ERISA by: 1. allowing the 1993 distribution without a valid QDRO, and 2. refusing to distribute funds pursuant to valid 1997 QDRO 17

18 Schoonmaker, 987 F.2d 410 (7 th Cir. 1993) Pursuant to informal unwritten practice, Plan placed hold on entire account balance before receipt of DRO» Plan procedures provided upon receipt of DRO: 1. notify participant; 2. send participant a copy of DRO and 3. place a hold on account during QDRO determination period Participant attempted 2 spot transactions which failed due to hold; participant sought restoration of account balance reflecting spot transactions By adopting informal practice, employer modified its written QDRO procedures and failed to comply with ERISA s writing requirement; participant may recover losses from premature application of hold 18

19 Stewart, 207 F.3d 1143 (9 th Cir. 2000) Participant is co-trustee and administrative committee-member; 1989 Marital Dissolution Order awards former spouse 50%; shortly after, another trustee unsuccessfully requested distribution to former spouse 1991 former spouse contacts non-participant co-trustee/committee-member and is advised to complete an application ; no reference is made to the order, ERISA s QDRO requirements, or the plan s QDRO procedures 1992 participant/co-trustee retires and receives 100% distribution 1997 former spouse sues seeking her share; employer argues order was not valid QDRO and former spouse lacks standing; district court agreed; 9 th Circuit reversed» ERISA requires upon receipt of any domestic relations order such as the Marital Dissolution Order plan must advise alternate payee of plan s QDRO determination procedures, determine if the order is a QDRO within a reasonable period, and notify alternate payee of its determination.» Trustees violated ERISA and denied former spouse chance to obtain valid DRO by: 1. failing to inform former spouse of QDRO procedures 2. failing to segregate 3. implicitly, but not expressly, rejecting QDRO If Plan had followed procedures by providing former spouse with plan s QDRO procedures, and timely notifying her of DRO rejection, could litigation have been avoided? 19

20 Singleton, 290 F.Supp.2d 767 (W.D.Ky. 2003) Feb former spouse provides unsigned, undated proposed order; plans notify former spouse that binding determination is provided on receipt of signed order Oct participant requests pension application and designates current spouse as surviving spouse; plans notify former spouse Nov participant retires, receives benefits; plans notify former spouse that, even if signed, order could not be considered QDRO due to current spouse vesting May 2002 plans (finally) receive signed order» Both funds say that a former spouse is a qualified spouse under the plans if he or she is required to be treated as a surviving spouse under a Qualified Domestic Relations Order. Prior to retirement, former spouse failed to provide signed DRO Under plans rules, former spouse could not be considered qualified Plans determination upheld; result at odds with original intent of divorced parties, but consistent with Plan s procedures 20

21 QDROs and SURVIVOR BENEFITS QDROs Entered After Death DOL Reg (c): an order does not fail to be a QDRO solely because of the timing of the order Ex: Participant and Spouse divorce, administrator receives DRO and determines it is deficient. Shortly thereafter, Participant dies while employed. Revised DRO is submitted after death of Participant. Revised DRO does not fail to be treated as a QDRO solely because of posthumous issuance Same result if no order had been issued before death 21

22 QDROs and SURVIVOR BENEFITS Survivor benefits irrevocably vest at annuity starting date and cannot be reassigned later (4 th, 5 th and 9 th Circuit) Cases of Interest Vanderkam, 2013 U.S.Dist. Lexis (D.D.C. May 7, 2013) Carmona, 603 F.3d 1041 (9 th Cir. 2010) Nat l City Corp. Non-Contributory Retirement Plan, 2005 U.S. Dist. LEXIS (N.D.W.Va. 2005) Hamilton, 433 F.3d 1091 (9 th Cir. 2006) 22

23 QDROs and SURVIVOR BENEFITS Vanderkam, 2013 U.S.Dist. Lexis (D.D.C. May 7, 2013) 1994 retirement, then-spouse designated as survivor beneficiary 2002 divorce decree awards participant all rights related to any plan» No QJSA waiver» No election of other benefit option within 90-day window 2003 participant remarries, state court issues DRO designating current spouse as alternate payee; plan approves 2005 plan terminates, PBGC as trustee determines former spouse is survivor beneficiary, not current spouse even if former spouse disclaimed survivor benefits, no reassignment by DRO allowed if participant is married at retirement, no QJSA waiver, no optional benefit election 23

24 QDROs and SURVIVOR BENEFITS Carmona, 603 F.3d 1041 (9 th Cir. 2010) 1988 participant married 8 th wife, designated as survivor beneficiary 1992 retirement and receipt of benefits 1994 divorce, court grants participant pensions as his sole and separate property 1997 participant marries 9 th wife, seeks QDRO substituting 9 th for 8 th 1999 participant dies, court orders plan to change survivor beneficiary to 9 th wife» Participant may not change survivor spouse beneficiary after retirement Annuity start date is 1992 retirement Allowing participant to change surviving spouse beneficiary after annuity start date creates administrative burdens To the extent provided in a QDRO the former spouse shall be treated as a surviving spouse 9 th wife is not former spouse, she married participant after retirement Surviving spouse benefits irrevocably vest at annuity start date and may not be reassigned to subsequent spouse 24

25 QDROs and SURVIVOR BENEFITS Nat l City Corp. Non-Contributory Retirement Plan, 2005 U.S. Dist. LEXIS (N.D.W.Va. 2005) Jan court enters DRO awarding former spouse 100% plan benefits July 2003 former spouse provides proposed QDRO; plan places 6-month freeze on account per internal procedure; participant dies with children as default beneficiaries; then plan approves proposed QDRO Plan only segregates while status of certified (signed by judge) order is being determined 6-month freeze prevents participant from applying for benefits unless certified QDRO is not received within 6-month period Aug. 7, 2003 signed order relating back to Jan submitted to plan, plan approves Aug. 15, 2003 Aug. 28, 2003 plan learns of participant death 18-month segregation period expired since Aug order related back to Jan Plan had not distributed death benefits to children per plan s 6-month freeze policy participant has no right to apply to receive benefits; death beneficiary can only inherit rights of participant QDRO granting alternate payee interest in benefits on date prior to participant s death is posthumously enforceable 25

26 QDROs and SURVIVOR BENEFITS Hamilton, 433 F.3d 1091 (9 th Cir. 2006) Participant and former spouse divorce, dissolution order names children as beneficiaries 2 months later participant remarries then unexpectedly dies Children claim death benefits, widow claims QPSA» Plan provides for QPSA, or if none payable, a lump sum to designated beneficiary» QPSA is payable, therefore no death benefit to children Surviving spouse benefit must be assigned to former spouse in QDRO to overcome surviving spouse s right to annuity 26

27 QDRO DETERMINATION COSTS Prior law ERISA Op. Ltr 94-32A: existence of alternate payee's right under QDRO cannot be encumbered by imposition of separate fee on participant or alternate payee in connection with DRO determination Current law DOL FAB : DC plan administrator may assess reasonable expenses attributable to QDRO determination against participant s individual account SPD must include summary of provisions that may result in charges/fees on a participant/beneficiary or individual account (DOL Reg (l)) and plan document to reflect expense allocation 27

28 QUESTIONS? Stephen M. Goodson, Esq. Keating Muething & Klekamp PLL Cincinnati, OH 28