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ATTORNEY FEES

QUALIFIED DOMESTIC RELATIONS ORDERS

There is ample basis for use of a Qualified Domestic Relations Order to obtain attorney fees for certain services rendered to a Former Spouse incident to divorce action. Unfortunately, absence of a full understanding of what may be paid and the procedure to obtain such payment has resulted in underutilization of this fee collection format.

These payments to the attorney will not be made directly from the Plan. Efforts by a family attorney to collect fees directly from the plan will be fruitless. It is emphasized in this article that attorney fees incurred by an Alternate Payee which are attributable to her or his attorney's efforts to secure for this Alternate Payee child support, alimony payments, retirement benefits or other marital property rights can be incorporated into a Domestic Relations Order.[1]

Specificity Regarding the Amount Payable to the Alternate Payee is not Required in the Order.

What is required is insertion into the Order of the Amount to be Paid to the Alternate Payee. A Plan Administrator may not inquire as to the basis of such sum. Nor may the Plan Administrator look beyond the amount to be distributed. Only QDRO Compliance Is Required.

A Qualified Domestic Relations Order: [2]

creates or recognizes the existence of an alternate payee's right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under a plan, and

(II) with respect to which the requirements of subparagraphs (C) and (D) are met

The Plan Administrator may not question the content of the Domestic Relations Order or the intent of the parties. For this to be a valid distribution only compliance with subparagraphs(C)and D)is required. Due to its significance Troyan has reproduced the two sections of Retirement Equity Act specifying the prohibitions to qualification. It is reproduced in full to establish that the procedure articulated in this article is not prohibited by the Retirement Equity Act. Full Text of "C" & "D" follows.

(C) A domestic relations order meets the requirements of this subparagraph only if such order clearly specifies--

(i) the name and the last known mailing address (if any) of the participant and the name and mailing address of each alternate payee covered by the order,

(ii) the amount or percentage of the participant's benefits to be paid by the plan to each such alternate payee, or the manner in which such amount or percentage is to be determined.

(iii) the number of payments or period to which such order applies, and

(iv) each plan to which such order applies.

(D) A domestic relations order meets the requirements of this subparagraph only if such order--

(i) does not require a plan to provide any type or form of benefit, or any option, not otherwise provided under the plan,

(ii) does not require the plan to provide increased benefits (determined on the basis of actuarial value), and

(iii) does not require the payment of benefits to an alternate payee which are required to be paid to another alternate payee under another order previously determined to be a qualified domestic relations order.

Commentary.

Recall Troyan's earlier observations:

A Plan Administrator may not inquire as to the basis of such sum.

Nor may the Plan Administrator look beyond the amount to be distributed.

In support of my position I reference Blue v. U.A.L.[3]

…ERISA does not require, or even permit, a pension fund to look beneath the surface of the order. Compliance with a QDRO is obligatory. "Each pension plan shall provide for the payment of benefits in accordance with the applicable requirements of any qualified domestic relations order."

This directive would be empty if pension plans could add to the statutory list of requirements for "qualified" status. Any domestic-relations order that satisfies the statutory conditions "shall" be paid…(emphasis mine).

Guidance

Direct Payment – Indirect Payment.

Based on the above the family attorney avoids insertion into the Domestic Relations Order of a provision for direct payment to the Practioner. Direct payment is limited to an Alternate Payee.[4]

Alternate Payee Defined:

The term "alternate payee" means any spouse, former spouse, child, or other dependent of a participant who is recognized by a domestic relations order as having a right to receive all, or a portion of, the benefits payable under a plan with respect to such participant.

Based on the applicable Retirement Equity Act provision, an attorney representing an Alternate Payee does not fall within this definition. Nevertheless, there is authority for incorporation into a Domestic Relations Order of attorney fees attributable to:

  • child support
  • alimony payments
  • retirement benefits
  • other marital property rights

Consider Tax Consequences.

Clearly if the amount due the attorney is distributed to the Alternate Payee there will be not less than 20% withheld for Federal Income Taxes. Again, there is no bar to a "gross up" of the sum due to the attorney to recognize the tax cost of the distribution.[5]

Who Gets the Distribution.

ERISA, mandates that the Alternate Payee is the distributee, however, it is permissible for the money to be sent to the attorney's office. The attorney will have the Alternate Payee endorse the check for the benefit of the attorney. [6]

Commentary.

In many instances the Alternate Payee is likely to want to "roll" her or his distribution into an Individual Retirement Account. In such cases the amount directly distributed to this Alternate Payee is be the sum due to the attorney. For Example.

Initial Pre-Adjustment Calculation for Taxes Calculation.

Total Distribution to Alternate Payee $250,000.00

Amount Due Attorney $15,000.00

Tax On Amount Distributed to Alternate Payee $3,000.00

Distributable Amount $12,000.00

GROSS UP CALCULATION FOR $15,000.00 TO ATTORNEY

Gross Up Addition $3,750.00

($3,000.00 * 1.25 = $3,750.00)

Total Distribution to Alternate Payee $18,750.00

Tax On Amount Distributed to Alternate Payee $3,750.00

Actual Amount To Attorney $15,000.00

Rolled into Alternate Payee's IRA $231,250.00

Focus on the "Rolled into Alternate Payee's IRA" sum. This reflects a loss to the alternate payee of the tax cost of the distribution to the Attorney ($3,750.00). The calculation below illustrates how to make the Alternate Payee "whole" by incorporating the Tax Cost into the Distribution to the Alternate Payee. To compensate for this Tax Cost the following Adjusted Calculation is made. Naturally, the calculation will vary with the statistics of your matter. It is the concept that is illustrated here.

Adjusted Distribution to Recognize Tax Cost

Total Distribution to Alternate Payee $253,750.00

Amount Due Attorney $15,000.00

Tax On Amount Distributed to Alternate Payee $3,000.00

Distributable Amount $12,000.00

GROSS UP CALCULATION FOR $15,000.00 TO ATTORNEY

Gross Up Addition $3,750.00

($3,000.00 * 1.25 = $3,750.00)

Total Distribution to Alternate Payee $18,750.00

Tax On Amount Distributed to Alternate Payee $3,750.00

Actual Amount To Attorney $15,000.00

Rolled into Alternate Payee's IRA $235,000.00

Adjusted Total Award to Alternate Payee $253,750.00

Final Thought.

The scenario presented in this newsletter is well suited to any form of Qualified Defined Contribution Plan,e.g. 401(k), Thrift Plan, Savings Plan, Profit Sharing Plan.



[1] See: 29 U.S.C 1056(d)(3)(B)(ii)(I).

[2] See: 29 U.S.C.1056(d)(3)(B)(i)(I).

[3] See 160 F.3d 383.

[4] See 29 U.S.C. 1056(d)(3)(K).

[5] Silverman v.Spiro, Supreme Judicial Court of MA., 784 N.E.2d 1, February 24, 2003. Which provided in relevant part:

The judge also correctly ordered that accommodation should be made for the tax consequences resulting from the liquidation of some of the mother's [participant's] retirement assets.

[6] Recall, the distribution has been effected, the money belongs to the Alternate Payee, so that this transaction should not be an issue.