The designation of a “Contingent Alternate Payees” does not violate IRC Section 414(p) or ERISA and is an assignment under the term assignment in the Treas.
By Rick Johnson (Texas)
Under most defined contribution plans, such as a profit-sharing plan or 401(k) plan, the plan administrator is required to segregate and account for the alternate payee’s separate interest. At this time, the benefits are normally non-forfeitable. As a result, the plan usually allows for either an alternate payee to designate a beneficiary or the plan directs that any unpaid benefits at alternate payee’s death be paid to the alternate payee’s estate. A statement should always be included in the QDRO that clearly spells out the alternate payee’s right to designate a beneficiary or reference to the plan’s requirements that any residual benefits shall be paid to the alternate payee’s estate.
Contingent Alternate Payees: Defined Benefit Plans
The question of what happens to an alternate payee’s assigned benefits when an alternate payee dies under a separate interest QDRO for a defined benefit plan when the alternate payee predeceases the participant prior to commencement of benefits to either the participant payee or alternate payee is somewhat more complex. Both Internal Revenue Code Section 414(p) and ERISA 206(d)(3) are silent on this.
In the case of a defined benefit plan when the alternate payee dies after the benefits to the alternate payee have commenced to the alternate payee, the benefit continues to be paid in accordance with the benefit option that was chosen. Such conclusion is based on the rule that a QDRO cannot change the form of benefit provided by the plan. If the form of benefit elected was a single life annuity, the annuity will terminate and no additional payments will be paid. If an optional form of benefit was elected, there may be residual benefits which may be payable to a designated beneficiary or the alternate payee’s estate.
However, what happens in the case of a separate interest QDRO for a defined benefit plan when the alternate payee dies before the benefit to the alternate payee is in pay status is a different matter. There is no clear authority on this issue. There are no regulations (issued by either the IRS or Department of Labor) that address this issue.
If a plan treats the alternate payee’s separate interest as a terminated vested interest, it is likely that the benefits cease as a matter of law or plan procedures. A terminated vested interest means that the benefits are payable only to the designated alternate payee and do not revert to the participant, even if the alternate payee dies before commencement of any benefits to the alternate payee
However, in the case of a plan that does not treat the alternate payee’s separate interest as a terminated vested interest (meaning that benefits may revert to a participant), it is likely that the benefits under the QDRO can be assigned to another alternate payee, contingent upon the death of the primary alternate payee. Some, but not all plan administrators recognize that such designation of a “Contingent Alternate Payee” does not violate any of the provisions of IRC Section 414(p) or ERISA and is an assignment contemplated by the definition of the term assignment in the Treas. Regulations at 1.401(a)-13(c)(1)(ii). The regulations define an “assignment” to include any direct or indirect arrangement (whether revocable or irrevocable) whereby a party acquires from a participant or beneficiary a right or interest enforceable against the plan in, or to, all or a portion of a plan benefit payment which is, or may become, payable to the participant or beneficiary.
Since a reversionary interest in an alternate payee’s benefits is a benefit that may become payable to a participant, it appears that such a benefit may be assignable to another alternate payee, even in the same order as the assignment to the primary alternate payee.
Since there is no clear authority one must look to IRC Section 414(p) and the requirements of the plan to determine what all of the options are under these circumstances.
IRC Section 414(p):
414(p)(1)(A) – Qualified domestic relations order – a domestic relations order – (i) which creates or recognizes the existence of an alternate payee’s 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 paragraph s (2) and (3) are met.
414(p)(1)(B) – Domestic relations order – any judgment, decree, or order (including approval of a property settlement agreement) which – (i) relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child or other dependent of a participant, and (ii) is made pursuant to a State domestic relations law (including community property law).
414(p)(8) – Alternate Payee – any spouse, former spouse, child or other dependents of a participant who is recognized by a domestic relations order as having a right to receive all, or a portion of, the benefits under a plan with respect to such participant.
414(p)(2) – Order must clearly specify certain facts. A domestic relations order meets the requirements of this paragraph if such order clearly specifies –
(A) the name and last known address (if any) of the participant and the name and mailing address of each alternate payee covered by the order.
(B) the amount or percentage of the participant’s benefits to be paid to each such alternate payee, or the manner in which such percentage is to be determined,
(C) the number of payments or period to which order applies, and
(D) each plan to which such order applies.
414(p)(3) – Order may not alter amount, form, etc., of benefits. A domestic relations order meets the requirements of this paragraph only if such order –
(A) does not require a plan to provide any type or form of benefit, or option, not otherwise provided under the plan,
(B) does not require the plan to provide increased benefits (determined on the basis of actuarial value), and,
(C) 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.
Had Congress had intended that contingent interests were to be prohibited, most likely a provision would have been included in IRC 414(p). Those things that Congress intended to prohibit were included as evidenced by Section 414(p)(3). Those things Congress required were also included as evidenced by 414(p)(2).
Rick Johnson operates QDRO Services, LLC in The Woodlands, Texas. The company was formed in early 1996 for the purpose of assisting attorneys and their clients with the division of retirement benefits and a QDRO solution when it is necessary.
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