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It is commonplace for a marital/community property
settlement to provide that upon the occurrence of a
future event (certain or contingent) one of the spouses
is obligated to make a payment to the other. For purposes
of this Practice Aid assume that the pension plan participant
has incurred an obligation to pay the Wife $50,000.00,
not later than June 22, 2005. It is emphasized that
this is an obligation unrelated to the equitable distribution
of the marital/community/community portion of the pension.
For example this liability of the Husband to the Wife
might be attributable to a future sale of property,
stock options or some other asset. Further assume that
the Husband age 44 is a participant in a 401(k) Plan
and that his accumulated interest in this plan is currently
$88,000.00.
The Property Settlement Agreement provided that the
Wife will receive a security interest to the extent
of $50,000.00 of the Husband’s 401(k) Plan [a
Qualified Defined Contribution Plan]. The purpose of
this security interest/lien is to guarantee that the
award made to the Wife in the 2003 Property Settlement
Agreement will be realized not later than June 30,2005.
Issue: Is a security arrangement in which a lien is
placed against the Husband’s interest in the
Plan in accordance with the terms of a Qualified Domestic
Relations Order an assignment permitted under Internal
Revenue Code §401(a)(13)(B)?
Traditionally, a QDRO against a 401(k) Plan provides
that the Wife (Alternate Payee) will receive her marital/community/community
share of the 401(k) Plan as soon as administratively
practicable subsequent to the qualification of the
Qualified Domestic Relations Order. A QDRO is the appropriate
vehicle to give to an Alternate Payee his/her interest
in such Plan. However, the skilled practitioner recognizes
that a 401(k) or similar Plan (Thrift Plan, Savings
Plan, Profit Sharing Plan, etc.) beyond the equitable
distribution of marital/community property. An alternate
use of pension assets can be to further insulate an
Alternate Payee from loss of future “guaranteed” or
contingent obligations provided for in the divorce
instrument. Too often the busy practitioner does not
recognize that a QDRO, has uses beyond the equitable
distribution of the marital/community portion of a
pension. This Practice Aid endeavors to alert the practitioner
to alternate uses of a QDRO against all Qualified Defined
Contribution Plans.
What is discussed in this Practice Aid is a more sophisticated
use of a QDRO. Troyan, Inc. views a lien as an excellent
tool to “lock in” that portion of the award(s)
to the Alternate Payee that might otherwise be defeated
by a future breach of covenant incident to the divorce.
Clearly, a Participant who causes dilution, diminution
or extinction of such future interest of an Alternate
Payee is subject to punitive action. Such remedy unfortunately
requires the Alternate Payee to return to court and
incur additional fees and expenses to receive that
which was awarded to her in the Judgment of Divorce.
We view the QDRO discussed herein as a device to minimize
the risk to an Alternate Payee of loss of future benefits
as a result of a breach of covenant by the Participant
Spouse.
It is emphasized that absent this QDRO created lien
the Husband (Plan Participant) has full discretion
regarding the assets in his 401(k) Plan. Regardless
of the language of the Property Settlement Agreement
the Husband would have unfettered rights to take full
or partial withdrawals/distributions from the Qualified
Defined Contribution Plan. Were the Husband’s
employment to be terminated or his Plan merged into
another as a result of a sale or consolidation the
problems of the Wife in receiving her $50,000.00 award
would be compounded. To avoid such problems Troyan, Inc.
has developed QDRO’s that are more expansive
and have a broader reach than a traditional QDRO.
This concept has found Federal support in Private Letter
Ruling # 9234014 and in Darby v. Commissioner, 97 T.C.
51 which stated:
Under the statute (section 414(p)(1)(A)(i) as enacted
by REA '84…, the status of an order as a QDRO
is not affected by whether the order makes the alternate
payee an owner of the interest under the plan or
merely gives the owner a lien or other security interest
in
the plan. (emphasis mine)
We do not intend to communicate the impression that
drafting of “security lien” Qualified Domestic
Relations Orders is a routine task. However, an examination
of a key drafting guide, the Pension Welfare and Benefit
Administration’s drafting guideline reveals no
bar to such form of Order. It is to be noted that this
guideline expressly states that it represents the view
of the Department of Labor. As the Retirement Equity
Act makes clear, it is the Department of Labor, not
the Internal Revenue Service that is the ultimate arbiter
of the QDRO rules. Nevertheless, as indicated above
at 97 T.C. 51 there is IRS support for the argument
Troyan has presented.
Still caution is merited. The inexperienced practitioner
may craft his/her Order so as to fail to recognize
the many nuances that must be treated in this complex
QDRO. Space and the desire to have you contact this
office for your drafting needs precludes an exhaustive
discussion of such nuances. Moreover, few Plan Administrators
are eager to receive this type of QDRO. Be prepared
for some reaction to this form of Order. As you are
aware Plan Administrators favor simple boilerplate
that readily conforms to some standardized format.
At a minimum the practitioner should be mindful of
the following prior to drafting:
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Internal Revenue Code §401(a)(9)(C) and mandatory
distributions.
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Internal Revenue Code §417 as it relates to death
benefits.
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Regarding death benefits, Fox Valley & Vicinity
Constr. Workers Pension Fund v. Brown , 897 F.2d 275
(1989) and its conflicting progeny.
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Tax attribution rules as indicated @ Lucas v. Earl,
281 U.S. 111 (1930).
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The subject Plan’s early distribution rules.
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The subject Plan’s reporting and disclosure rules.
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Qualified Defined Contribution Plan Reversion Rules.
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PWBA qualification guidelines.
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