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The
benefits accumulated under qualified pension and
profit sharing plans are often one of the largest
assets a married couple owns. If the couple
divorces, sometimes their retirement benefits must
be divided. Since 1984, federal pension law has
provided special procedures enabling family courts
to divide pensions in a divorce or separation.
Although the rules governing the division of
retirement plan benefits in a divorce are
straightforward, strict compliance with applicable
legal requirements is necessary to avoid possible
plan disqualification or the taxation of benefits to
the participant rather than the one receiving the
benefits.
Qualified Domestic Relations
Orders
Pension law authorizes qualified
retirement plans to comply with state court domestic
relations orders dividing pension benefits, whether
by separate court order or a court-approved property
settlement agreement. However, the order must
satisfy certain requirements in order to be
considered a "qualified" domestic relations order (QDRO).
Generally, a domestic relations order is used to
provide child support or alimony payments, or to
divide marital property as part of a divorce. The
QDRO creates or recognizes a right of an alternate
payee to receive all or a portion of the benefits
payable to a plan participant. The alternate payee
is usually the spouse or former spouse but can also
be a child or other dependent of the participant.
Plans are required to have written reasonable
procedures for determining whether domestic
relations orders are QDROs and for administering
distributions. The procedures should be designed to
ensure that QDRO determinations are made in a
timely, efficient and cost-effective manner,
consistent with the administrator's fiduciary duties
under ERISA.
Valid QDRO Determination
The plan administrator is
responsible for determining whether an order is a
QDRO. However, it is not the plan administrator's
task to evaluate the fairness of the QDRO but only
to determine that the order meets the legal
requirements to be a valid QDRO.
To be a valid QDRO, the order must be sent to the
plan administrator and clearly specify the following
required information:
 | The name and last known
mailing address of both the participant and each
alternate payee covered by the order;
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| The amount or percentage of
the participant's benefits to be paid to the
alternate payee (or the manner in which the
amount or percentage is to be determined);
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| The number of payments or
period to which the order applies; and
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| The name of each plan to
which the order relates. |
A domestic relations order is not
a QDRO if:
| It requires the plan to
provide an alternate payee with any type or form
of benefit not otherwise provided by the plan;
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| It requires the plan to
provide for increased benefits; or |
| It requires the plan to pay
benefits that are already required to be paid to
another alternate payee under a prior QDRO.
|
Plan Administrator QDRO Duties
In most cases, the employer is the
plan administrator. The employer may be the plan
administrator as a corporate entity, if it is a
corporation, or as a partnership, if that is its
business structure. Or, the plan administrator may
be a named individual or a committee appointed by
the employer.
The plan administrator is required to promptly
notify both the participant and alternate payee of
receipt of the order and to provide to them a copy
of the plan's written procedures for determining
whether the order is a QDRO.
During the review process, the plan administrator
must separately account for the amounts that would
be payable to an alternate payee, and be careful
that benefits are not wrongly paid out to the
participant, i.e., participant loans, hardship
withdrawals, or withdrawal of employee
contributions.
It is the plan administrator's responsibility to
declare that a domestic relations order is a QDRO
within a reasonable period of time after receipt of
the order. The plan administrator must notify the
participant and alternate payee as to whether the
order is a QDRO. If it is determined that the order
is not a QDRO, the plan administrator must provide
the following information to the participant and
alternate payee:
| The reasons why the order is
not a QDRO; |
| References to the plan
provisions on which the determination is based;
|
| An explanation of any time
limits that apply; and |
| A description of any
additional information or modifications
necessary for the order to be a QDRO and an
explanation as to why it is necessary.
|
As a practical matter, the plan
administrator will ordinarily contact its pension
and/or legal advisors for confirmation that the
court order is a valid QDRO and for assistance in
complying with both the procedural notice
requirements and implementation of the QDRO.
Access to Plan Information
The plan administrator must
provide prospective alternate payees who are
involved in a domestic relations order proceeding
access to plan and participant benefit information
sufficient to prepare a QDRO, such as the summary
plan description, a copy of the plan document and a
statement of the participant's benefit entitlement.
The plan administrator may condition disclosure
of such information to a prospective alternate payee
on some reasonable basis for concluding that the
request for information is being made in connection
with a domestic relations proceeding.
When Benefits Can Start
In general, pension law does not
require payments to begin to an alternate payee
until the "earliest retirement age" of the
participant, defined as the earlier of two dates:
| The date the participant is
entitled to a withdrawal under the plan, or
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| The later of either:
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- The date 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.
Such payments are permitted even though the
participant is still employed at the time and
intends to remain employed in the future.
Plan documents or written QDRO procedures may
permit earlier distribution of benefits to the
alternate payee. Many plans avail themselves of the
opportunity to provide immediate cash-out of
alternate payee benefits in order to avoid the need
for segregated accounts, extended division of
present and future benefits and other administrative
headaches.
Division of Benefits
The method used for dividing the
retirement benefits payable to an alternate payee
will depend upon whether the plan is a defined
benefit plan or a defined contribution plan.
Defined Benefit Plans
Generally, a defined benefit plan
provides a specific benefit determined and payable
at retirement. The benefit is usually determined
based upon factors such as years of service and
compensation of the participant, and is payable in
the form of a monthly benefit.
Because of the nature of the
benefits provided by defined benefit plans, division
of such benefits in divorce proceedings may raise
complex issues. Benefits may have not yet fully
vested in the participant, and there may be
substantial future accruals which may or may not be
taken into account under the QDRO. Valuation of
defined benefit amounts may be based on a variety of
methods.
Many defined benefit plans do not allow lump sum
payouts to alternate payees. Therefore, the
alternate payee must accept an annuity form of
benefit, which may not be payable until the
participant is entitled to retirement benefits.
Defined Contribution Plans
Instead of promising a future
benefit like defined benefit plans, defined
contribution plans provide an individual account for
each participant. The account grows through employer
and/or employee contributions, earnings and, in some
cases, forfeitures from the nonvested portion of the
accounts of terminated participants that are
reallocated to the remaining participants.
For defined contribution plans, the alternate
payee generally receives a percentage of the
participant's vested account balance (such as 50%)
as of a particular date, although a dollar amount
may be specified. If the parties agree as to the
division fraction and if immediate distribution is
permitted and selected, the only remaining issue may
be how currently to value the alternate payee's
interest since many defined contribution plans are
not valued on a daily basis.
Tax Treatment
Payments to a participant's spouse
or former spouse are taxable to the spouse. The
spouse or former spouse of the participant may elect
to have all or a portion of a lump sum payment
pursuant to the QDRO directly rolled over to an IRA
or another qualified retirement plan, thereby
deferring the tax. Any portion not rolled over is
generally subject to federal income tax as well as
any applicable state income tax but not the 10%
early withdrawal penalty.
Distributions to other alternate payees, such as
the child of the participant, are taxed as income to
the participant, may not be rolled over and are not
subject to the 10% early withdrawal penalty.
Modifying QDRO Benefits
Earlier this year, the DOL issued
Advisory Opinion 2004-02A regarding modifications
made by a court to an existing QDRO. This guidance
states that a new domestic relations order covering
the same parties can alter a prior one so long as
the new order meets the qualification requirements
for a QDRO. Generally, the changes would only apply
to future payments.
Allocating QDRO Expenses
In May 2003, the Department of
Labor (DOL) issued Field Assistance Bulletin (FAB)
2003-3, which completely reversed its prior position
regarding charging an individual participant's
account for the fees related to a determination of
the validity of the participant's QDRO. Prior to FAB
2003-3, plans were permitted to pass on QDRO
determination expenses to the plan as a whole but
not directly to the account of the participant
involved in the QDRO. Plans are now permitted to
allocate reasonable expenses associated with QDRO
determinations directly to the participant's
account.
In order to take advantage of the DOL's new
position, the plan's document may need to be amended
to include specific provisions for the allocation of
expenses. In addition, plans must include
information in the summary plan description
concerning any expenses that could be charged
against a participant's account.
Conclusion
QDROs require special language and
should be carefully reviewed to make sure they meet
the requirements of the law and are administrable
under the terms of the plan. The protection afforded
by the federal government to a divorcing spouse adds
one more administrative chore for the plan
administrator. But with proper consulting and legal
advice, the plan can handle QDROs without a great
deal of strain.
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