Division of Retirement Benefits - Is a QDRO Necessary?
Is your plan subject to division by a QDRO?
The Employee Retirement Income Security Act of 1974 (ERISA) provides that private employee benefit plans must meet certain requirements to maintain their qualified, and therefore tax-advantaged, status. QDROs are part of this regulatory structure. Therefore, any plan that is subject to ERISA will require a QDRO to divide a participant's plan account. These plans include both defined benefit plans (traditional pension plans), defined contribution plans (401(k), 457(b), 403(b) plans), and cash balance pension plans (a relatively new type of plan that has aspects of both defined benefit and defined contribution plans).
Is your plan divisible without a QDRO?
There are some retirement benefit accounts that are not subject to the ERISA rules regarding QDROs. For example, Individual Retirement Accounts (IRAs) can be divided by completing the appropriate forms required by the plan administrator.
Is your plan not divisible by a QDRO?
It is not safe to assume that all retirement benefits are divisible at the time of divorce. Many companies provide "non-qualified" retirement benefits to their highly compensated employees. These plans often have names like "supplemental," "non-qualified," "excess benefit," or "SERP." Generally, these types of benefit plans are not subject to ERISA and, therefore, cannot be divided by a QDRO. Similarly, under Georgia law, certain governmental retirement plans, for example, the Georgia State Teachers Retirement Plan and the Employees' Retirement System, are not required to accept QDROs.
The non-employee spouse in a divorce is often disappointed to learn that their "share" of a retirement plan account, often one of the largest assets in a marriage, is not easily separable and awardable to them in the divorce action. Under these circumstances, it is prudent to consider an award of another marital asset of equal value to the retirement benefit (if such an asset or assets are available). In the event an equivalent asset is not available the non-employee spouse might be required to wait for his or her share of the payments until the former spouse retires and begins to receive payments.
QDRO Definitions and General Requirements
What is a domestic relations order?
A domestic relations order (DRO) is a judgment, decree or order (including the approval of a property settlement) that is made pursuant to state domestic relations law (including community property law) that relates to the provision of child support, alimony payments, or marital property rights for the benefit of a spouse, former spouse, child, or other dependent of the plan participant.
What is a qualified domestic relations order?
A qualified domestic relations order (QDRO) is a domestic relations order that (1) creates or recognizes the existence of an Alternate Payee's right to receive, or assigns to an Alternate Payee the right to receive, all or a portion of the benefits payable with respect to a Participant under a pension plan, (2) includes certain information and meets certain other requirements which are set forth below, and (3) has been submitted to, reviewed by and determined to be qualified by the Plan Administrator.
Additional QDRO definitions:
A defined benefit plan generally provides for a lifetime of monthly payments payable upon an employee's retirement that is calculated by a formula which uses the number of years worked, the employee's age at retirement, and the employee's wage history.
A defined contribution plan generally creates an account for each employee participating in the plan and provides retirement benefits based solely on contributions to that plan by the employee and/or the employer, together with any gains, losses, income, dividends, and forfeitures allocated to that account.
A cash balance pension plan generally provides for an account for each employee in that plan but the balance of each account is based on pension credits and interest credits that the employee earns. Cash balance pension plans are technically defined benefit plans but have features that resemble defined contribution plans.
A Participant is the person who is recognized by the pension plan as having a right to benefits from the plan as a result of his or her employment with the sponsor of the retirement plan.
An Alternate Payee is the spouse, former spouse, child or other dependent of the Participant.
Information Required to be Included in a QDRO:
A QDRO must contain the following 4 items of information:
1. the name and last known mailing address of the Participant and each Alternate Payee;
2. the name of each plan to which the domestic relations order applies;
3. the dollar amount of percentage (or the method of determining the amount or percentage) of the benefit to be paid to the Alternate Payee; and
4. the number of payments or time period to which the domestic relations order applies.
Provisions Required to be Excluded from a QDRO:
A QDRO cannot contain any of the following 4 provisions:
1. The domestic relations order must not require a plan to provide an Alternate Payee or Participant with any type or form of benefit, or any option, not otherwise provided under the plan.
2. The domestic relations order must not require a plan to provide for increased benefits (determined on the basis of actuarial value).
3. The domestic relations order must not require a plan to pay benefits to an Alternate Payee that are required to be paid to another Alternate Payee under another order previously determined to be a QDRO.
4. The domestic relations order must not require a plan to pay benefits to an Alternate Payee in the form of a qualified joint and survivor annuity for the lives of the Alternate Payee and his or her subsequent spouse.
Although the requirements for a QDRO appear straightforward, there are many more forces at work determining what important additional provisions should be included in a DRO that will be submitted for qualification. For example, a DRO for a pension plan should address whether the alternate payee will be treated as the participant's surviving spouse for all purposes or simply to protect that alternate payee in the case the participant dies before retirement. Also underlying the drafting of any DRO is the operation of the retirement plan to be divided and that plan's QDRO guidelines. Many plan's QDRO guidelines contain assumptions that the plan will make about your DRO if the DRO is silent on an issue. Therefore, what goes in the DRO is often as important as what is omitted and the provisions that will best protect the interests of a party to a QDRO, such as the issue of surviving spouse treatment, must be included in the settlement agreement in order to be included in the DRO.
Viewing a QDRO as a formality to be attended to only after a divorce is final is unwise. Complete information about all retirement benefits (account statements, summary plan descriptions and QDRO guidelines) should be obtained and reviewed prior to negotiating the settlement agreement. Because a QDRO is not an impartial document and parties to the QDRO have conflicting interests failure to take control of the QDRO issues in a divorce can result in your client's interests being undermined. Therefore, we recommend that you negotiate for your client the right to prepare and file all required QDROs.