QDROs - Frequently Asked Questions

What is a QDRO?
A Qualified Domestic Relations Order is an order entered by family court that assigns to a spouse, former spouse, child or other dependent the right to receive all or a portion of the benefits payable to a participant under a qualified retirement plan. IRC Section 414(p)(1); ERISA Section 206(d)(3)(B).

The family court order must be a judgment, decree or order entered pursuant to the state’s domestic relations laws which relates to the provision of child support, alimony or the division of property to a spouse, former spouse, child or other dependent of the participant.

Why is there such a thing as a QDRO?
A QDRO is the creation of the Retirement Equity Act of 1984. Before QDROs, there was confusion over whether a former spouse should be considered a creditor. Retirement Plans are subject to anti-alienation rules that protect the retirement benefits from creditors, and have special tax-deferred status which can be lost if the Plan does not follow strict rules regarding contributions and distributions. Many plans would not honor a divorce decree that awarded a portion of the retirement benefits to the non-employee spouse, because they risked losing their qualified status, which provides special tax deferred status to all of the participants, if they violated the anti-alienation rules by making distributions to creditor/ spouses.

ERISA made an exception to the anti-alienation rules to permit distributions to be made pursuant to QDROs.

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Why do I need a QDRO?
The exception to the anti-alienation rule is narrow, and can only be made when certain criteria are met. The judgment by itself is rarely sufficient to be considered a QDRO. Plan administrators must be careful about making distributions, because if they violate the rule, the entire plan could lose it’s qualified status, which would mean that every worker who has tax-deferred assets in the plan would be subject to back taxes and penalties.

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What is a Participant?
A Participant is the employee who participates (has an interest in) the retirement plan.

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What is an Alternate Payee?
An Alternate Payee is the former spouse (or current spouse, child, or other dependent) of the worker/ Participant.

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What kinds of retirement plans exist?
There are two kind of qualified retirement plans: Defined Benefit Plans and Defined Contribution Plans. Don’t mix terms: Defined Benefit plans cannot be paid out as a single lump sum, and do not have earnings or losses.

Defined Benefit Plans
· These are the traditional pension Plans
· Pays out over the course of the worker’s lifetime (or some other chosen period)
· Payment based on years of service and salary prior to retirement
· Payment Options: Alternate payee (non-employee spouse) will receive monthly payments, based either on her lifetime or on the worker’s lifetime.
· Other payment options: some plans offer a guaranteed payment period (most commonly a ten year certain option). The payments would be paid for the longer of the stated period or the lifetime of the recipient. So even if the recipient died in year two, payments would continue to recipient’s beneficiary for the remainder of the period.

Defined Contribution Plans
· These are savings plans, such as 401(k), 403(b), Money Purchase Plan, Employee Savings Plan
· Usually in the form of an investment account, with an ascertainable present value
· Payment will be in a lump sum, although worker can invest the balance into an annuity upon retirement, and the monthly benefits will then be based on the amount invested.

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Are all retirement plans Qualified?
No, although most employer retirement plans are qualified. To be qualified means the plan is subject to 414(p) of the Internal Revenue Code and Section 206(d) of the Employee Retirement Income Security Act of 1974, as amended, and therefore can be divided by QDRO.

Non-Qualified Plans are federal, state and local government retirement plans, Post Office, military, churches, railroads. These plans generally will accept domestic relations orders, not qualified domestic relations orders. The single biggest problem with non-qualified plans are that the Alternate Payee does not have the protections of ERISA such as

· benefit might not start until the participant (employee spouse) starts his benefits, whereas with qualified plans, benefit can start at the participant’s earliest retirement date (for defined benefit plans) and sometimes immediately (for defined contribution plans)
· benefit may stop on the death of the participant or the death of the alternate payee, whichever comes first
· if participant dies prior to retirement, it is possible that the alternate payee will receive nothing

Highly Compensated Employees also have supplemental plans in addition to qualified plans. The supplemental plans generally cannot be divided.

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Do IRAs require QDROs?
No. IRAs are not qualified plans and do not require QDROs. If an
IRA is to be divided, you must ensure that the transfer is from
IRA to IRA, even if the former spouse receiving the benefit is planning
to cash it out. If the former spouse were to take a distribution
from the original IRA, the owner (the other spouse) would end up
with the tax liability.

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What should my judgment of divorce set forth to facilitate preparing the QDRO?
· Clearly identify the plan - use its correct name.
· Make sure you know if the plan is a defined benefit plan or a defined contribution plan.
· Clearly state the amount of the award and how it is to be determined

For a defined benefit plan, state how the benefit should be divided:
· Shared Payment: The parties share the payments to the Participant. Alternate Payee must wait until the Participant retires before commencing benefits. Can require the Participant to name the Alternate Payee as 50% (or other percent, if plan allows) contingent annuitant.
· Carve Out: The plan administrator carves out the Assigned Benefit and adjusts that benefit to be payable over the life of the Alternate Payee. Alternate Payee can start benefits any time on or after the Participant’s earliest retirement age.
· State whether award includes Cost of Living Increases Early Retirement Subsidies or Post Divorce Enhancements.

For defined contribution plans:
· State the valuation date
· State whether the award should be adjusted for interest, earnings and losses from the valuation date through the date of distribution
· Know whether the plan administrator will calculate earnings and losses
· Know whether the plan will allow an immediate lump sum distribution or whether the Alternate Payee will have to wait to receive the benefit.
· The judgment should state whether there are any loans outstanding and whether the division should be of the balance after deducting the loan balance.

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Will the Alternate Payee have to pay a penalty if s/he takes an early distribution of the retirement funds?
No. The ten percent premature distribution tax does not apply to distributions made pursuant to a QDRO. IRC Sec. 72(t)(2)(C). Although the distribution will still be taxable income, and 20% will be withheld towards this tax obligation, no penalty applies. This may free up a source of funds for the divorcing parties. Be warned: the penalty will apply if the client rolls the funds into an IRA, and then takes cash out, since that is two transactions, and the actual distribution (from the IRA) is not pursuant to a QDRO.

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Can a QDRO be used for back Child Support or Alimony?
Yes! This works best, however, if the Participant has a defined contribution plan. Be aware that for child support, the tax should be the Participant’s.

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Do both parties have to sign the QDRO?
QDROs do not have to be signed by both parties. If there is no consent, however, the court should conduct a hearing, at which the opposing party can argue why order should not be entered. The court can then decide whether to enter the QDRO over the opposing party’s objection.

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Is there any rush to complete the QDRO?
Yes! The Alternate Payee could lose the entire benefit if the Participant retires or dies before the QDRO is served on the Plan Administrator.

· Narrowed options: If Participant retires before the QDRO is entered by the court, the alternate payee will be stuck with whatever payment option the Participant selects at retirement. It will not be possible to carve out the benefit, or to provide the alternate payee with survivorship options.
· Death: If the participant or alternate payee dies before the QDRO is accepted by the plan administrator, it is very likely that no benefits will be payable.
· Difficulty Determining the Award: If too much time passes, the plan may not be able to determine what the account balance was as of the date of divorce, or to be able to calculate earnings and losses. Plans are changing administrators with greater frequency. New administrators do not have access to individual account balances or investment information prior to their taking over.

My Plan has model QDROs. Why don’t I just use those?
The model orders are not meant to substitute for legal advice, and do not take into account all of the options available to the parties. Orders are frequently drafted for the convenience of the Plan Administrator, and may not contain options that would better fit the judgment.

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Why should I pay someone other than my attorney to prepare the QDRO?
My office deals almost exclusively with QDROs, which means I can prepare the QDRO more quickly and efficiently than most other lawyers. It can be time consuming and difficult to follow up with the Plan Administrators during the QDRO drafting and pre-approval process. In my experience, QDROs are relegated to the bottom of the pile by most divorce lawyers, because the case has already gone to judgment, and there are other, more pressing files to deal with.

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