In June 2010, the Employee Benefits Security Administration issued a final rule containing further guidance for plan administrators relating to the prompt notification of qualified domestic relations order (QDRO) determinations. This followed an interim final rule published in March 2007 involving the timing of a QDRO.
Often a divorce settlement determines that all or a portion of a participant’s retirement plan benefit should be split and paid to an alternate payee—defined by the IRS as a spouse, former spouse, child or other dependent of a participant. A court order that gives an alternate payee the right to receive the benefits of a participant from a qualified retirement plan must meet certain requirements to be considered a QDRO.
The Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code offer assurance that a participant’s retirement benefits will remain available to provide financial support during retirement years by making it illegal for benefits to be assigned to another person. However, a QDRO provides the one exception that allows retirement benefits to be given to another person.
It is not mandatory that a QDRO be issued as a separate document. In fact, a divorce decree or court-approved property settlement can include a QDRO if all the requirements are satisfied. However, a QDRO must be issued by a state agency, usually a court, before it qualifies. Until a court order is recognized as a QDRO, retirement plan benefits cannot be distributed from a qualified plan.
A QDRO must include basic information about each party including the names and mailing addresses of the parties, name of the plan, dollar amount or percentage to be paid to the alternate payee (e.g., $50,000, or 50 percent of the balance as of 12/31/10), and the number of payments or time period to which the order applies (e.g., one lump sum payment, or monthly payments during the alternate payee’s lifetime).
Although each QDRO must contain these provisions, the specific content of the rest of the QDRO will depend on the type of retirement plan, the nature of the participant’s benefits and other issues specific to the situation.
The participant and the alternate payee should be provided with benefit information such as a summary plan description, the plan document and a participant’s benefit statement, if requested. They might assign an attorney to receive copies of notices and offer advice on these matters.
Every plan administrator should develop written procedures for determining whether a domestic relations order (DRO) is a QDRO and for administering distributions under it. This will help make determinations in a timely, efficient and consistent manner. An employer may choose to process a QDRO in-house or pay an attorney, recordkeeper or actuary to process it.
For those who process court orders in-house, there are certain best practices to keep in mind:
• Develop a model QDRO template for each retirement plan approved by your attorney. Although not required, it saves time and money in trying to reach an agreement between the parties.
• On receipt of a draft copy of the QDRO from the attorney, make sure that all the information is complete, is accurate and follows your plan guidelines before a response is generated. The proposed QDRO cannot require a benefit or form of benefit not otherwise provided under the plan. If the draft is not acceptable, include the reasons for the rejection with references to the plan provisions on which the determination is based. Include a description and an explanation of any additional material or information necessary to accept the QDRO.
• Notify the participant and alternate payee promptly of the draft, and provide them with a copy of the plan’s procedures.
• Once the plan administrator determines that the draft is “qualified,” the approval should be sent to the attorney for final revisions and submission to the court.
• On receipt of the final court order, notify the participant and alternate payee promptly.
• Review the plan document to determine whether (and how) fees may be charged to the participant or alternate payee for determining the status of a QDRO.
During the period when a determination is being made, the plan administrator is responsible for protecting the individual account assets for the participant and the alternate payee. This might mean that no distributions (loans or hardship withdrawals) may be taken during this 18-month period. Distributions to the participant are not allowed for assets that might be paid to the alternate payee if the order is determined to be a QDRO.
Processing of the retirement plan benefit according to the QDRO should occur within a reasonable time after receipt of the final court documentation. That period depends upon the circumstances. For example, a court order that is clear and complete when received will require much less time than one that is incomplete or unclear.
Typically, once the QDRO determination is made and the QDRO is accepted by the plan administrator, it is approved by the court and a final official copy of the QDRO is sent to the plan administrator. Depending on the type of retirement plan and the details set forth in the order, the plan administrator will split the account into two accounts and the alternate payee will becomes a plan participant.
An immediate distribution can be made to the alternate payee if applicable (e.g., in a defined contribution plan). A defined benefit plan typically treats the alternate payee’s pension benefit as any other participant’s, and distribution may be delayed until a certain age or other requirements are met.
Several examples in the final rule issued in June 2010 clarify that a QDRO will not fail to qualify simply because of the time frame in which it was issued. These examples focus on QDROs issued after the death of a participant, after the parties divorce and after the participant’s annuity starting date.
QDROs are mandatory orders with which a plan sponsor must abide, and they should be followed conscientiously. The U.S. Department of Labor holds high expectations of plan sponsors with the fiduciary responsibility of determining QDROs.
Patricia Look has been the editor of the BottomLine Benefits & Compensation newsletter for J.J. Keller & Associates since its inception in 2007. She has worked in benefits and compensation management, with a focus on retirement plans and executive compensation, for over 25 years. In particular, her expertise includes 401(k) plans, qualified pension plans, deferred compensation, and supplemental plans for executives.
Post-Murder Divorce Order Defeats Ex-Husband’s Claim to 401(k) Funds, SHRM Online Legal Affairs, August 2010
EBSA Issues Final Rule on Qualified Domestic Relations Orders, SHRM Online Benefits Discipline, June 2010
Supreme Court Upholds Plan Documents’ Beneficiary Designation, SHRM Online Legal Affairs, January 2009
Cohabitant Awarded Half of Boyfriend’s Pension, SHRM Online Legal Affairs, January 2009
Pension Protection Act: New QDRO Rules on Distributions, SHRM Online Benefits Discipline, March 2007
Divorce, Non-Spouse Beneficiaries and the Pension Protection Act, SHRM Online Benefits Discipline, September 2006
Qualified Domestic Relations Orders, SHRM Research Articles, May 2001
SHRM Online Benefits Discipline