Transcript When Bad Things Happen to Good Participants

When Bad Things Happen
to Good Participants—
Clickand
to QDROs,
edit Master
title
ESOPs
Disability
andstyle
Death
The ESOP Association
2014 Las Vegas Conference
and Trade Show
Friday, November 14, 2014
2:00-2:50
1
Before we get started:
 Please fill out a session evaluation form and
drop it off at the table outside of this room
– Your feedback on topics and presenters is important
and will be used to develop subsequent TEA
programs
 Take a moment to silence your cell phone
 Remember to get your CPE sheet stamped
before and after each session for CPE credit
2
Presenters:
Barbara Clough, QPA, QKA
Susan D. Lenczewski, Esq.
Managing Director
Blue Ridge ESOP Associates
154 Hansen Rd, Suite 102
Charlottesville, VA 22911
[email protected]
Telephone: (434) 220-7944
Moss & Barnett, P.A.
150 South Fifth Street, Suite 1200
Minneapolis, Minnesota 55402
http://www.lawmoss.com
[email protected]
Telephone: (612) 877-5250
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Bad things we will be covering:
 Divorce: Qualified Domestic Relations
Orders (QDROs)
 Death: beneficiary designations
 Disability
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QDRO – What and Why?
 Qualified Domestic Relations Order
– The really important question: How do you
pronounce the acronym?
 Cue-DRO
 Qua-DRO
 ERISA Anti-Alienation Rule
– Cannot assign or alienate the participant's
interest in a retirement plan to another person
– QDRO exception
5
QDRO – What and Why? (cont’d)
 Domestic Relations Order
– Court order issued pursuant to state
domestic relations laws
 NOT the divorce Judgment & Decree
 Creates Alternate Payee's right to all
or a portion of the Participant’s
account
– Alternate payee must be spouse, exspouse, child or other dependent
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QDRO Requirements
 A domestic relations order does not
become a “QDRO” until (i) it has been filed
with the Court (i.e., is a certified order)
and (ii) has been determined to be
“qualified” by the Plan Administrator.
 A provision in the parties’ divorce decree
that states that the Participant’s account in
a retirement plan is to be divided with the
Alternate Payee IS NOT a QDRO.
7
QDRO Requirements (cont'd)
 Five items of information needed:
– Name and current address for the Participant
and the Alternate Payee
– May include Social Security Numbers for the
Participant and the Alternate Payee
 State law may prohibit SSNs due to privacy concerns
– Exact name of the retirement plan
– Assignment of benefit amount:
 $ amount or
 percentage of vested portion of account as of X date
– Timing of benefit payment to Alternate Payee
8
QDRO Requirements (cont’d)
 Timing of payment provision:
– The Plan document will specify how early an Alternate
Payee can receive a distribution
 Some ESOP sponsors want to “get rid” of Alternate Payees (so they
don’t hold stock that will increase in value or give them voting
rights) as soon as possible.
 Some ESOP sponsors don’t want Alternate Payees to get a
distribution sooner than the Participant could receive a distribution.
– Can the Plan state that the Alternate Payee will not
receive a distribution until the participant separates from
service?
– No, the most restrictive the Plan can be is to restrict
distribution to the Alternate Payee to the date on which
the participant reaches (or would reach) the “Earliest
Retirement Age.”
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QDRO Requirements (cont’d)
 Timing of payment provision:
– “Earliest Retirement Age” means the earlier of:
 The date on which the Participant is entitled to a distribution under
the Plan or
 The later of:
– The date on which the Participant reaches age 50; or
– The earliest date on which the Participant could begin receiving benefits
under the Plan if the Participant separated from service.
– Examples (under a typical ESOP):
 Participant is still employed and just turned age 46
– ERA is the later of the date on which the P turns age 50
(November 2018) or by the end of the plan year that is the fifth
year after this year (when distributions are made in 2019)
 Participant terminated employment in 2012 and just
turned age 48
– ERA is the earlier of the end of the plan year that is the fifth
year after 2012 (when distributions are made in 2017) or when
the P turns age 50 (November 2016)
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QDRO Provisions
 Additional provisions typically
included:
– Recitation of three ERISA limitations

“This order:
1. Does not require the Plan to provide any type or form of benefit, or any option, not
otherwise provided under the Plan;
2. Does not require the Plan to provide increased benefits; and
3. Does not require the payment of benefits to an Alternate Payee that is required to be
paid to another alternate payee under another order previously determined to be a
qualified domestic relations order.”
– Recitation of governing law (federal and state)

“This order is intended to constitute a Qualified Domestic Relations Order ("QDRO") under
Section 414(p) of the Internal Revenue Code of 1986, as amended (“Code”), and Section
206(d)(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and shall be interpreted and administered in conformity with such laws.”

“This order is entered pursuant to the authority granted under the applicable domestic
relations laws of the State of Minnesota.”
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QDRO Provisions (cont'd)
 Additional provisions typically
included:
– Provisions that address what happens upon the
death of either party
 Except that the QDRO cannot require the Plan to pay benefits to
an Alternate Payee in the form of a qualified joint and survivor
annuity for the lives of the alternate payee and spouse
– A provision that addresses whether the amount
assigned to the Alternate Payee will be credited
with earnings or losses (would apply if the Plan
re-shuffles the Alternate Payee’s account)
12
QDRO Provisions (cont'd)
 Additional provisions typically
included:
– Addresses allocation of the cost of determining
the qualified status of a QDRO and any costs of
implementing the QDRO (if the Plan permits
such expenses to be paid by accounts and
permits allocation between the Participant and
Alternate Payee accounts)
– Addresses what happens if either party is
overpaid or receives a distribution that should
have gone to the other party
13
QDRO Responsibilities
 Plan Administrator:
– Must generally treat the Alternate Payee as if
he or she were a Participant:
 Same distribution rights
– As to form of payment
– As to timing, except see slide 23 regarding
“earliest retirement age”—Alternate Payee may
have the right to distribution earlier than the
Participant
– As to electing a direct rollover to an IRA
 Same right to vote if the account has stock
 Same right to investment earnings or losses
 Same right to designate a beneficiary
14
QDRO Responsibilities (cont'd)
 Plan Administrator
– Must have written QDRO procedures in place
(and follow those procedures) for determining
the qualified status of an order
 If contacted by a Participant, Alternate Payee or legal
counsel for either that a divorce is pending and a QDRO will
be necessary, must provide each party with a copy of the
QDRO Procedures
– If requested, must provide the Summary Plan
Description to the Participant and should provide
the SPD to the Alternate Payee
– Upon receipt of a QDRO, must notify the Participant
and Alternate Payee that the QDRO has been
received
15
QDRO Responsibilities (cont'd)
 Plan Administrator
– Is strongly advised to develop a model QDRO
to send along with the QDRO Procedures
 Although the Plan Administrator is not required to
provide a model QDRO, being able to provide it along
with the QDRO Procedures will save everybody time
and money, including the Plan Administrator.
 The Plan Administrator cannot require the parties to
use the model QDRO but can state that use of the
model will mean that the Order is more likely to be
considered a QDRO.
– Strongly encourage the parties to submit a
QDRO to the Plan Administrator for review in
proposed form (before filing in with the Court).
16
QDRO Responsibilities (cont'd)
 Plan Administrator
– Within a reasonable period after receiving a
QDRO, determine whether the Order is
qualified and notify the Participant and
Alternate Payee of such determination
– If Order is not qualified, explain why not and
suggest replacement language that would be
considered qualified
– Use of ESOP legal counsel to do the review and
issue the determination on behalf of the Plan
Administrator is highly recommended
17
QDRO Responsibilities (cont’d)
 Plan Administrator
– required to separately account for the
Alternate Payee’s assigned benefit during
the period that a QDRO is under review to
determine if it is qualified
– may need to consider suspending actions
with respect to the Participant's account
upon notice that the parties to a divorce
will be submitting a QDRO or upon receipt
of a proposed QDRO (but no absolute
requirement to do so until actual QDRO is
received)
18
QDRO Timeline
1.
2.
3.
4.
Participant is in the process of getting a divorce and notifies
the Plan Administrator that he or she will be needing a
QDRO.
Plan Administrator promptly sends out QDRO Procedures
and Model QDRO to the Participant and Alternate Payee
(same address or different address if known).
Participant and Alternate Payee share the information with
their respective attorneys.
Alternate Payee’s attorney prepares a proposed QDRO
based on the divorce judgment and decree and, after
obtaining approval of the Participant’s attorney, sends the
proposed QDRO to the Plan Administrator.
19
QDRO Timeline (cont'd)
5.
6.
7.
8.
The Plan Administrator sends the proposed QDRO to the
Company’s ESOP counsel who reviews the proposed QDRO
and informs the parties either (i) that it will be considered
qualified once it is filed with the Court or (ii) that it will not
be considered qualified unless changes are made. These
are explained and replacement language provided.
If the proposed Order was approved, the parties submit it
to the Court. It will be filed and signed by the Court.
If the proposed Order was not approved, changes are made
and the proposed Order is re-submitted to the Company’s
ESOP counsel.
The parties submit the Court-approved, filed and certified
QDRO to the Company’s ESOP counsel who issues the
determination that the QDRO is qualified (copies to both
parties).
20
QDRO Timeline (cont'd)
9.
The Plan Administrator sends the certified QDRO to the
Recordkeeper who provides the Alternate Payee with
distribution notices and election forms (if distribution can
occur immediately).
This process, from the date that the Participant provides initial
notice to the Plan Administrator to the date of distribution to
the Alternate Payee, typically takes at least 4 months and can
be as long as 12 months or more, depending on how quickly
the attorneys turn documents, whether the parties are able to
reach agreement on any disputed issues and the QDRO and
ESOP knowledge of the divorce attorneys.
21
QDRO Concerns
 Amount awarded
–
–
–
–
Percentage as of a date that is not a valuation date
Earnings and losses
Vesting
Death of Alternate Payee or Participant before
distribution
 Timing of distribution to Alternate
Payee
 Impact of Diversification
 Impact of Re-Shuffling
22
Other Anti-Alienation Situations
 Tax Liens
 Mandatory Victims Restitution Act
 Offset if Participant is ordered to
pay due to a crime involving the
Plan or due to a civil judgment or
settlement with the DOL involving a
fiduciary breach related to the Plan
23
Death Benefits
 Who do you pay?
 How do you pay?
 When do you pay?
24
Death Benefits –Who do you pay?
 Beneficiary
– Check the Plan's terms to determine who is
the Beneficiary
 Primary Beneficiary
– Spouse
 Spousal consent necessary to name someone
other than the Participant's spouse
– Other named individual
 Failure to have form on file
25
Death Benefits –Who do you pay?
(cont’d)
 Slayer Statutes
 Divorce without Beneficiary Change
 Rollovers to IRAs
 QJSA – ESOPs not required to
provide
26
Death Benefits –Other Comments
 Vesting
 Diversification – beneficiaries not
eligible
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Beneficiary Designations
 Primary Beneficiary
– Spouse, if married
 One-Year Marriage Rule
 Common Law Marriages
 Failure to Consent
 Lack of Designation
28
Designated Beneficiary for RMDs
 Must be an individual
– Designated by participant or by the plan
document
– Impacts life expectancy factor for calculation of
RMD
 A sole beneficiary who is a spouse that is more than
10 years younger than the participant will impact the
factor used in the calculation
– Determines period over which distributions
may be made after a participant's death
29
Designated Beneficiary for RMDs
(cont’d)
 Trust as Beneficiary
– Underlying beneficiaries of the trust may be
treated as designated beneficiaries if four
requirements are met
 Trust must be irrevocable
 Trust must be valid under state law
 Beneficiaries must be identifiable from trust
instrument
 Plan Administrator must receive copy of the trust or a
list of beneficiaries of the trust
30
Beneficiary Designations
 Plan Administrator's Responsibilities
– Keep signed forms on file
– Request updated forms periodically
– Keep your ear to the ground
31
Disability Benefits
 Distributions allowed due to
disability
– Law does not prescribe how disability
must be defined for distribution
purposes
– Law does prescribe a disability
definition for tax purposes with regard
to the 10% early distribution tax
32
Disability Benefits
 Review status of participant at
termination date versus disability
date
 Plan is not required to 100% vest
due to disability
 Plan may provide additional
allocation to participant in year of
disability
33
Disability Benefits
 Ensure that all necessary
documentation is received
 General ESOP Rule – payment
commences by end of the plan year
following the plan year in which
severance due to Disability occurred
34
Case Study
 Participant terminates employment
– Marital status - divorced
– Two minor children
 Several months after termination she
is diagnosed with terminal illness?
 Is she disabled?
35
Case Study
 Participant grants ex-husband Power
of Attorney
– Under POA ex designates beneficiary
– Participant dies before form received by
Plan Administrator
 Is the designation valid?
 If no form on file, who is the
beneficiary?
36
Questions?
37
Closing Reminders
 Please fill out a session evaluation form and
drop it off at the table outside of this room
– Your feedback on topics and presenters is
important and will be used to develop subsequent
TEA programs
 Remember to get your CPE sheet stamped
before and after each session for CPE credit
38