Intro to Pension Plans

What are Qualified Plans?  What are Non-Qualified Plans?  What does “Qualified” Mean?  Please keep in mind this is not an in-depth discussion, just an introduction to some concepts and terminology:

One way to look at Non-Qualified plans is to look at IRAs, Deferred Compensation, various Incentive Bonus and Stock Option Plans.  Plans without a Plan Administrator, or any plan that does not fall under ERISA regulations would be considered Non-Qualified.  But what exactly does “Qualified” mean?  Very simply, if the plan carries a Plan Administrator, that plan is going to be qualified, literally by this Plan Administrator.

For instance, say you own a 401(k) or 403(b) plan provided to you as a retirement benefit by your current employer.  That plan is required to be “Qualified” and is regulated by ERISA.  So, somebody manages or administers the 401(k) or 403(b).  Plan Managers or Administrators might include Great Western Financial,  Met Life, Fidelity, Vanguard, TIAA-CREF, among a host of others.  These managers or administrators can be looked at as having two major components, administrative and investment.  The investment managers do just that, manage the investment options.  Fees are included for their management in addition to the internal fees charged by each mutual fund or investment option offered through the plan.  The administrative component includes all overhead and administration expenses that might range from sales personnel, office space, telephones computers, to the Statements issued directly to you.  The administrative component is also responsible for compliance with regulations and providing you with what is referred to as a “Summary Plan Description.”  This SPD is a very important document provided to the owner of the 401(k) or 403(b) plan by the Plan Administrator.  This Plan Administrator is the person responsible for “Qualifying” the plan under ERISA.  This person literally signs off on the plan.  Thus the term “Qualified Plan.”

Incident to a divorce, when dividing pension plans such as 401(k) or 403(b), Qualified Plans can be divided once an equitable agreement has been reached by the divorcing couple.  To effect this division of the Qualified Plan you or your attorney must request a Domestic Relations Order (DRO) be issued by the court.  Under ERISA this DRO must be approved by the Plan Administrator.  The Plan Administrator might even be able to provide a model document in compliance with their specific Summary Plan Description.  Once approved, the DRO becomes a QDRO, a “Qualified” Domestic Relations Order.

Getting back to IRAs, a non-qualified trust, since there is no Summary Plan Description and an IRA does not fall under ERISA, you would be hard pressed to get a DRO “Qualified.”  Yet, on occasion the financial firm holding your IRA might demand a QDRO, would you believe not even realizing they act as Trustee, not as a plan administrator.  Rather than fight their policies, offer a DRO to split the IRA as needed.

We will discuss Roth IRAs and other non-qualified retirement plans in upcoming postings.






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