1. 1 Click to edit Master title style The ESOP Association 2014 Las Vegas Conference and Trade Show Friday, November 14, 2014 2:00-2:50 When Bad Things Happen to Good Participants— ESOPs and QDROs, Disability and Death

2. 2 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

3. 3 Barbara Clough, QPA, QKASusan D. Lenczewski, Esq. Managing DirectorMoss & Barnett, P.A. Blue Ridge ESOP Associates150 South Fifth Street, Suite 1200 154 Hansen Rd, Suite 102Minneapolis, Minnesota 55402 Charlottesville, VA 22911http://www.lawmoss.com Bclough@blueridgeesop.comSusan.Lenczewski@lawmoss.com Telephone: (434) 220-7944Telephone: (612) 877-5250 Presenters:

4. 4 Bad things we will be covering:  Divorce: Qualified Domestic Relations Orders (QDROs)  Death: beneficiary designations  Disability

5. 5 QDRO – What and Why?  Q ualified D omestic R elations O rder –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

6. 6 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, ex- spouse, child or other dependent

7. 7 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.

8. 8 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

9. 9 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.”

10. 10 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)

11. 11 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.”

12. 12 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)

13. 13 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

14. 14 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

15. 15 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

16. 16 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).

17. 17 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

18. 18 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)

19. 19 QDRO Timeline 1.Participant is in the process of getting a divorce and notifies the Plan Administrator that he or she will be needing a QDRO. 2.Plan Administrator promptly sends out QDRO Procedures and Model QDRO to the Participant and Alternate Payee (same address or different address if known). 3.Participant and Alternate Payee share the information with their respective attorneys. 4.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.

20. 20 QDRO Timeline (cont'd) 5.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. 6.If the proposed Order was approved, the parties submit it to the Court. It will be filed and signed by the Court. 7.If the proposed Order was not approved, changes are made and the proposed Order is re-submitted to the Company’s ESOP counsel. 8.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).

21. 21 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.

22. 22 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

23. 23 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

24. 24 Death Benefits  Who do you pay?  How do you pay?  When do you pay?

25. 25 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

26. 26 Death Benefits –Who do you pay? (cont’d)  Slayer Statutes  Divorce without Beneficiary Change  Rollovers to IRAs  QJSA – ESOPs not required to provide

27. 27 Death Benefits –Other Comments  Vesting  Diversification – beneficiaries not eligible

28. 28 Beneficiary Designations  Primary Beneficiary –Spouse, if married  One-Year Marriage Rule  Common Law Marriages  Failure to Consent  Lack of Designation

29. 29 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

30. 30 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

31. 31 Beneficiary Designations  Plan Administrator's Responsibilities –Keep signed forms on file –Request updated forms periodically –Keep your ear to the ground

32. 32 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

33. 33 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

34. 34 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

35. 35 Case Study  Participant terminates employment –Marital status - divorced –Two minor children  Several months after termination she is diagnosed with terminal illness?  Is she disabled?

36. 36 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?

37. 37 Questions?

38. 38 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