Ask the Experts April 6, 2021

QBAD Distribution Limits When One Spouse Doesn’t Participate in a Retirement Plan

Experts from Groom Law Group and CAPTRUST answer questions concerning retirement plan administration and regulations.

Reported by

“Our 403(b) plan allows for qualified birth or adoption (QBAD) distributions consistent with the SECURE Act’s amendments to Internal Revenue Code section 72(t)(2). Recently, we had a plan participant request a QBAD for $10,000 related to the adoption of a child, but the plan participant’s spouse is NOT a participant in our 403(b) plan. We realize that under the SECURE Act, each spouse, individually, is eligible for a $5,000 QBAD from an eligible retirement plan, but can the plan participant take a single $10,000 QBAD from our 403(b) plan to cover both spouses? The spouse does not have a retirement plan or IRA from which to take a QBAD, which is why the participant is requesting the $10,000 distribution.”

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

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The recent IRS Notice addressing QBADs and other Setting Every Community Up for Retirement (SECURE) Act provisions (Notice 2020-68) does not address this issue directly. On the surface, it seems to make sense that if both spouses individually are eligible for a QBAD of $5,000, then the plan participant could request a QBAD of $10,000 to cover both spouses when the his/her spouse does not participate in an eligible retirement plan. However, the $10,000 distribution is not likely to be permitted under the QBAD rules.

The Notice addresses this issue indirectly through Q&A D-7, as follows:

Q. D-7: May each parent receive a qualified birth or adoption distribution up to $5,000 with respect to the same child or eligible adoptee?
A. D-7: Yes. Each parent may receive a qualified birth or adoption distribution of up to $5,000 with respect to the same child or eligible adoptee.

So each parent has the right to take his/her own $5,000 QBAD. Neither spouse has a right to take a $10,000 distribution as a QBAD for a single child. Thus, even though the other spouse in this case does not have a eligible plan/IRA from which to take a QBAD, this does not matter, as the other spouse is not permitted to “double up” on the distribution.

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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Compliance April 5, 2021

Wesco Distribution Faces Lawsuit Over Retirement Plan Services Fees

Among other things, the plaintiffs contend that prudent fiduciaries monitor and limit revenue sharing and make sure excessive indirect compensation is rebated to plan participants.

Reported by

Wesco Distribution and the administrative and investment committee for the Wesco Distribution Inc. Retirement Savings Plan have been sued for allowing excessive retirement plan services (RPS) fees.

According to the lawsuit, from 2015 through 2019, plan participants paid a portion of the fees for retirement plan services provided by the plan’s recordkeeper directly through deductions from their accounts. In addition, RPS fees were paid indirectly through revenue sharing. “Based upon a review of the plan’s Forms 5500, and upon information and belief, the plan did not rebate any of the monies received from revenue sharing back to plan participants to offset the RPS fees paid by the participants,” the complaint says.

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The plaintiffs contend in their lawsuit that prudent retirement plan fiduciaries monitor and limit the amount of indirect compensation, such as 12b-1 and sub-transfer agency fees, to make sure that plan participants are not overcharged for recordkeeping, and they require that excessive fees be rebated to plan participants. The lawsuit says participants paid between $159 and $194 per year in RPS expenses between 2015 and 2019, calling the fees “exorbitant and unreasonable.” The plaintiffs say the fees were not in line with the fees paid by participants in other similar plans.

They also contend that the plan’s fiduciaries were required to continuously monitor RPS fees and to regularly solicit competitive bids to ensure fees being paid to the plan’s recordkeeper were reasonable. “However, defendants failed to employ prudent processes for ensuring that fees were and remained reasonable. To the extent there was a process in place that was followed by defendants, it was imprudent and ineffective given the objectively unreasonable RPS fees paid,” the complaint states.

The plaintiffs argue that the level and quality of services provided by the plan’s RPS provider did not justify paying on average more than two-and-a-half times the reasonable market rate for retirement plan services. In addition, the lawsuit says that “because revenue sharing payments are asset-based, the already excessive compensation paid to the plan’s RPS provider became even more excessive as the plan’s assets grew, even though the administrative services provided to the plan remained the same.”

The lawsuit also alleges that the defendants consistently chose mutual fund share classes with higher operating expenses when identical, lower-cost shares of the same funds were available.

Wesco Distribution has not yet responded to a request for comment.

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