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'QDRO Hold' Don't Assume it. . .

DEFINED CONTRIBUTION PLANS "QDRO HOLD"

UNEXPECTED OUTCOMES

More than 50% of U.S. Retirement Plans are of the Defined Contribution type. These plans generally hold participant assets in the form of an "Individual Account". These participant accounts often accumulate substantial sums. As a result of the worth of a participant's account it is often the focus of a divorce action. Consider the following.

The Scenario.

Mary and John are dissolving their marriage. Mary is a well-paid long service employee of KQR Vending. In the course of this divorce action it is agreed that the marital worth of Mary's account in her 401(k) Plan as of June 25, 2013 was $800,000.00. As part of the Marital Settlement Agreement John is to receive as soon as administratively practicable subsequent to the qualification of a Domestic Relations Order half of the worth of this account.

John's attorney prior to entry of the divorce or the actual completion of a Domestic Relations Order to implement this agreement notified KQR Vending of the parties agreement and requested a "QDRO HOLD" be placed on Mary's account until the Domestic Relations Order was formally submitted. This attorney did not:

  • Request a copy of the Plan's QDRO Guidelines
  • Request written confirmation that the Plan would comply with her request

Sometime thereafter, the parties divorced and a Domestic Relations Order was submitted to the Plan assigning to John one half the value of Mary's account.

Activity Between the Determination of the Value of Mary's 401(k) and the Plan's Receipt of the Domestic Relations Order?

Mary had reason to believe that a start-up firm she had contact with was about to make a major announcement of a new medical product. Mary thus shifted $500,000.00 from her 401(k) Account held as AAA rated Bonds to invest in the stock of this start-up. The major announcement did not come. At the time the Domestic Relations Order was received by the Plan, on August 14, 2013 Mary's $500,000.00 had diminished to $50,000.00. Thus, at the time the Order was received the worth of Mary's account was $350,000.00.

The Order was Qualified and John received $175,000.00.

Why Did This Happen? Who is Responsible for John's "loss"?

The informed practitioner knows that the term "QDRO HOLD" is not found in the ERISA statutes. However, there is no bar to a Plan's inserting language permitting a "QDRO HOLD" into its QDRO Qualification Written Guidelines. Absent this provision a Plan may not apply a "QDRO HOLD" on a participant's account. See Schoonmaker v. Amoco Corporation, U.S. Court of Appeals, 7th Circuit, 987 F.2d 410.

To avoid this outcome the prudent attorney will:

  • Confirm prior to settlement that the Plan's Written Guidelines permit a "QDRO HOLD"
  • If the Plan does not have such provision in its Guidelines then it becomes the duty of the attorney representing the alternate payee make clear to the court the necessity of "segregating" some portion of this asset in order to insulate it from significant diminution