faq5

What IS a QDRO, anyway?

Introduction

This article is a primer on QDROs. A QDRO is a Qualified Domestic Relations Order. It is a court order that divides a private sector retirement plan pursuant to state domestic relations law that relates to child support, spousal support or marital property rights for the benefit of a spouse, former spouse, child or other dependent of a plan participant. The formal definition of "QDRO" can be found in the Internal Revenue Code (the Code) at 26 U.S.C. 414(p) and in the Employee Retirement Income Security Act (ERISA) Sec. 206(d)(3) (now codified in the U.S. Code at 29 U.S.C. 1056(d)(3). There are parallel statutes allowing division of federal, state and municipal retirement plans. These government plans are similar to ERISA plans in the broad sense that they may be divided pursuant to state domestic relations law, but the mechanics of such plans and the rules for dividing them are different from ERISA plans. The regulations for dividing federal pensions by court order can be found in the Code of Federal Regulations at 5 C.F.R. 838. The statute governing the division of military pensions is the Uniformed Services Former Spouse Protection Act (USFSPA), 10 U.S.C. §1408. The statute governing state and municipal retirement plans is the Eligible Domestic Relations Order (EDRO) Act, MCL 38.1701, et seq. The majority of retirement plans, however, are private sector plans governed by ERISA, and this article focuses on the statutory requirements for the division of these ERISA plans and the key issues to be considered in drafting.

 

Authority Permitting Division by QDRO

Generally, ERISA and the Code do not permit a participant to assign his or her interest in a pension plan. The Retirement Equity Act of 1984 (REA), however, amended ERISA to allow for assignment of benefits pursuant to domestic relations matters without violating the antialienation provisions of ERISA. The REA's provisions are scattered throughout titles 26 (Internal Revenue Code) and 29 (ERISA) of the U.S. Code. 29 U.S.C. 414(p) and 1056(d) are the codification of the sections of the REA that permit a participant to assign part or all of his or her interest in an ERISA Plan.

The U.S. Department of Labor (DOL) has jurisdiction to interpret the QDRO provisions of ERISA and the Code. The DOL's interpretations can be found in the DOL publication "QDROS.The Division of Pensions Through Qualified Domestic Relations Orders." This booklet can be found on the DOL's website at the link http://www.dol.gov/ebsa/Publications/qdros.html.

 

Mandatory QDRO Provisions

The QDRO must state the name and last known mailing address of the participant and each alternate payee. Note that the social security numbers and dates of birth are not required under ERISA, but the Plan may require them. To prevent identity theft, social security numbers and dates of birth should be included as an attachment that is attached after the QDRO is entered in court.

The QDRO must contain the name of the Plan(s) to be divided. The plan name must be the formal name of the plan. Obtaining the full formal name of the plan is frequently one of the biggest hurdles in properly drafting the QDRO because the plan name on account statements is often an abbreviated version of the formal plan name. Once the formal name of the plan is obtained, research can be done to determine how the plan works and what QDRO language will be acceptable to the plan administrator. Note that most plan administrators will require each plan to have its own QDRO. For example, two QDROs will almost always be necessary when dividing a participant's defined contribution plan and also his or her defined benefit plan.

The QDRO must specify the dollar amount or percentage (or the method of determining the amount or percentage) of the benefit to be paid to the alternate payee. It is quite common for the exact amount to be unknown, and for the intent to be equal division of the marital portion; therefore the QDRO will more often than not be drafted to define the martial portion with words, and not numbers. The QDRO must specify the number of payments or the time period to which the QDRO applies. For defined contribution plans, the number of payments is generally one (1), since an account balance is being divided. For defined benefit plans, the time period will normally be for the lifetime of the alternate payee, or the lifetime of the participant. It is acceptable to specify payments based on the alternate payee's or the participant's lifetime because defined benefit plans base the payments on actuarial assumptions.

Note that the above are the only requirements for what the QDRO must contain, but a good QDRO will contain far more. A good defined contribution QDRO will address not only the amount or percentage of the assignment, but also gains and losses from the date of division to the date of distribution, the treatment of any outstanding loans as of the date of division (normally the date of divorce), the treatment of any contributions made to the plan after the date of division that are attributable to periods prior to the date of division, and also the procedure in the event of the death of the parties before the assignment is effectuated. A good defined benefit QDRO will address not only the amount or percentage of the assignment, but also the issue of how the marital portion is to be defined, survivor benefits, early retirement benefits, post-retirement cost-of-living increases, procedure in the event the plan is paid as a disability pension, and potential refunds of participant contributions. A good QDRO for either a defined contribution plan or a defined benefit plan should not only address each of the above mentioned benefits provided by the plan, but also important boilerplate provisions such as retention of jurisdiction, procedure in the event of erroneous payments, taxation and limitations on what the plan is required to pay. A QDRO is not good merely by virtue of its acceptance by the plan administrator. Indeed, a QDRO can be approved by the plan administrator while not meeting the intent of the parties, and this can lead to problems when the benefits are eventually paid.

 

Prohibited QDRO Provisions

The QDRO must not require the plan to provide an alternate payee with any type or form of benefit, or any option, not otherwise provided under the plan. This issue arises most frequently when the participant is not yet eligible to receive a benefit, even though he or she may be fully vested. Generally, if the participant is not yet eligible to receive a distribution, neither is the alternate payee. For defined benefit plans this means that the alternate payee may not commence his or her monthly benefit until the Participant is eligible to retire. For defined contribution plans this technically means that the alternate payee may not receive a lump sum cash payment, nor may he or she rollover the assigned amount until the participant would be eligible to do so. Notably, plan administrators will usually allow an alternate pay to take the distribution or rollover anyway, presumably because they have amended the formal plan document to so allow.

The QDRO must not require the plan to provide for increased benefits (e.g. determined on the basis of actuarial value) above the value of the participant's interest in the plan. For example, if an alternate payee who is younger than the participant is assigned one-half of the participant's $1,000/month benefit, and the alternate payee is to receive the benefit for the alternate payee's lifetime, the plan will typically make an actuarial adjustment to the alternate payee's benefit, and the $500 monthly benefit will be adjusted downward because the benefit is projected to be paid for a longer period of time. Note that some plans will adjust the participant's benefit instead, though this is fairly uncommon. Plans that adjust the participant's benefit instead of the alternate payee's benefit ask, "How much of the participant's benefit must we take to pay the alternate payee $500 for life?" When this is done for an alternate payee who is younger than the participant, the participant's benefit is actually reduced by more than $500. Because of this possibility, the QDRO must be clear about whose benefit shall be actuarially adjusted.

The QDRO must not require the plan to pay benefits to an alternate payee that are already required to be paid to another alternate payee under a previous QDRO. While simple on its face, the issue deserves thought when dividing a pension of a participant who may have already divided their interest in the plan due to a previous domestic relations matter from a previous marriage. Last, the QDRO must not require the plan to pay benefits to an alternate payee in the form of a qualified joint survivor annuity based on the lives of the alternate payee and a subsequent spouse. The theory here is that retirement plans are designed to pay benefits to participants, and to provide survivorship benefits to spouses and former spouses.

 

QDRO as Document Separate From

Judgment of Divorce or Separate Maintenance ERISA does not require the QDRO to be a separate document from the judgment. However, if the judgment is submitted in the hope that the plan administrator will accept it as a QDRO and the plan administrator rejects it, you will be faced with having to prepare an amended QDRO, the terms of which will very probably conflict with the judgment. It is rare for the judgment to suffice as a QDRO. It is a better idea for the judgment to express the intent of the parties as to the various plan benefits, in fairly general terms, such terms to be specifically tailored in the QDRO for acceptance by the plan. The judgment should mention all the plan benefits and express the intended amount or percentage the alternate payee should receive, e.g. fifty percent of the martial portion. Addressing all the various plan benefits is especially important in light of current case law that requires each individual benefit to be addressed in the judgment in order for them to be properly included in the QDRO. Roth v. Roth, 201 Mich. App. 563 (1993) , Quade v. Quade, 238 Mich. App. 222 (1999) , and more recently Gingrich v. Vanderwerp, Mich. App. No. 226039, unpublished.

 

Who can be an Alternate Payee

An alternate payee must be a spouse, former spouse, child or other dependent of the plan participant. If the alternate payee is a minor child or legally incompetent, the QDRO can require payment to someone with legal responsibility for the alternate payee, such as a guardian, person acting in loco parentis or trustee. Recall that distributions from defined contribution plans may be taken in cash or rolled to another qualified plan or an IRA. In the case where a cash distribution is being taken so that the client can pay attorney fees, the QDRO may not require payments to be paid to the attorney. The check must payable to the alternate payee client, but the payment can be required to be sent to such attorney, "care of" the alternate payee client. This is sometimes a workable way for attorneys to track funds for the purpose of obtaining fees.

 

Plan Administrator Duty to Qualify or "Nonqualify" Order as a QDRO

The plan administrator is responsible for the determination of whether an order qualifies as a QDRO. 29 U.S.C. 1056(d)(3)(G) (i) and (ii). The state court may approve of, and enter an order, but the plan administrator has the final say as to whether it qualifies as a QDRO. Notwithstanding the above sections in this article regarding what must be in, and what may not be in, a QDRO, plan administrators have a great deal of latitude in the strictures they may impose on the contents of a QDRO; therefore it is incumbent on the drafter to understand how the plan works and what phraseology the plan will honor. Note that approximately fifty percent of QDROs are rejected on their first submission to the plan administrator. If a QDRO is rejected, a first amended QDRO should be prepared, entered in court and submitted to the plan administrator. Because of this, the drafter should try to obtain conditional preapproval before the parties waste time executing and entering the QDRO.

 

Learning Plan Mechanics and the Plan's Preferred QDRO Phraseology

The plan's benefits can generally be determined from the Summary Plan Description (SPD), but SPDs sometimes leave out, or address indirectly, certain benefits such as early retirement subsidies and post-retirement cost-of-living increases. Because of this, the QDRO should sometimes include language that states, "If the plan pays.the alternate payee shall receive a share of." If you doubt the adequacy of the SPD, you may want to obtain the formal plan document. Both the SPD and the plan document can be obtained at the participant's request or by subpoena. The plan administrator is the person or entity specifically designated in the formal plan document as the administrator. Note, however, that many plan administrators delegate the QDRO review to another person or entity.

Some of the preferred QDRO phraseology can be gleaned from reviewing the SPD, and also from the model QDRO, if any. Note however, that company provided model QDROs are generally designed to make the plan administrator's review of the QDRO easy, and the model may not mention certain benefits which could be divided, and will likely not fully explain the options for coordination of the various benefits.

 

Summary

Employer sponsored, ERISA qualified plans may be divided pursuant to state domestic relations matters. ERISA and the Code impose basic requirements for QDRO contents, but a good QDRO contains much more. No QDRO should be prepared without the benefit of thoughtful research, which can be done by communication with the plan administrator, and obtaining and reading the SPD, model QDRO, if any, and possibly the plan document itself. Documents received from the plan administrator are important pieces to the drafting puzzle, but cannot be relied on to be complete; therefore a solid understanding of how retirement plans generally work, and the benefits typically provided, is also important.