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;
- 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);
- The number of payments or period to which the order applies;
and
- 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;
- 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
- The later of either:
- 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.
[top of page]
|
