QDRO's: Frequently Asked Questions

Introduction

Since the enactment of the Employee Retirement Income Security Act (ERISA) in 1974, retirement plans have become increasingly important to employees and their families as a source of income and security. Defined benefit plans, for instance, not only provide an added source of income during an employee’s retirement, but they also offer an employee, and his or her family, survivor or death benefits, disability benefits, and early retirement incentives. For parties to a dissolution or legal separation, the retirement plan may be the single most important marital asset. For the participant spouse, there are serious concerns over the depletion of his or her accrued benefit or account balance, as well as the need to provide protection for a future spouse and/or children. For the non-participant spouse, the assets at issue may be the sole source of retirement income in addition to Social Security. Both parties need assurances that the division is done accurately and that their rights under the plan are fully protected. This can only be accomplished by an individual with a thorough understanding of the retirement plan involved and the laws governing retirement plans and QDRO’s.

QDRO’s present unique problems for parties in a domestic relations proceeding. On the surface, QDRO’s appear simple – especially where the parties are cooperating with one another. Many attorneys and non-attorneys, however, try to use a “one-size fits all” approach to drafting the court order. In other instances, individuals blindly utilize a plan’s model QDRO without a full appreciation of the legal and financial consequences of certain provisions. This lack of knowledge is often detrimental to one or both parties by causing an improper allocation of benefits, loss of rights under the plan, or total or partial loss of benefits upon death of the participant.

QDRO’s have become a sub-specialty of family law that lies at the intersection of family law and pension law. This is a product of both the ambiguities in the statutes dealing with QDRO’s and resulting litigation at both the federal and state level.

What is a QDRO?

The term “QDRO” stands for Qualified Domestic Relations Order. A QDRO is a special type of court order that divides retirement plan benefits between parties in a dissolution or legal separation.

Why do I need a QDRO?

Both you and your spouse (or former spouse) have certain rights to benefits under a particular retirement plan. The person who earned the retirement benefit through his or her employment is called the “participant.” The other person is referred to as the “alternate payee.” Federal laws governing retirement plans prohibit a plan from paying benefits to anyone other than the participant, unless directed to do so under a QDRO. Accordingly, a QDRO allows the plan to pay benefits to the alternate payee.

Is a QDRO needed for all types of retirement plans?

Governmental or public retirement plans (e.g., military pensions, federal, state, county or city retirement plans) are not subject to the QDRO rules. These plans do, however, typically require a court order for dividing retirement benefits, which resemble QDRO’s.

Will the QDRO preparer compute the amount payable to the alternate payee?

Unless the Marital Settlement Agreement (MSA) or judgment provides the amount payable to the alternate payee, the QDRO preparer will use a formula that instructs the plan administrator how to compute the amount payable to the alternate payee. It is a common misconception that the QDRO will include the amount payable to the alternate payee. A formula has the advantage of accounting for adjustments to the benefit over time. In limited circumstances where a fixed dollar award is required, the QDRO preparer will refer the client to a qualified professional to perform the calculation, if necessary.

Can the QDRO preparer represent both the participant and alternate payee?

No. There is a common misconception that there is only one way to prepare a QDRO. In fact, the QDRO preparer has many options even with the most basic plans. Even when the parties claim to agree on everything related to the division of benefits, there are a multitude of unforeseen events that could present a conflict of interest for the attorney.

How will payment be made to the alternate payee?

If the plan allows for a lump sum distribution, the alternate payee can elect to receive his or her share in one single payment or rollover his/her share to an Individual Retirement Account (IRA) or other eligible plan. This is typical of 401(k) or profit sharing plans. Defined benefit plans, however, generally only pay benefits in monthly installments or “annuities.” If the plan will only pay benefits in the form of an “annuity” the alternate payee will typically receive monthly payments for life.

How does the death of either party impact benefits payable under a QDRO?

This answer depends on a variety of factors such as the type of plan involved, whether the participant is retired, and the wording of the QDRO. For instance, in the case of a defined benefit plan, if the participant is not retired the QDRO can provide that the alternate payee will receive benefits over his or her lifetime. In this case, the participant’s death will not impact the alternate payee’s benefits once payments to the alternate payee begin. In the case of a 401(k), the participant’s death will have no impact on benefits payable to the alternate payee assuming proper wording in the QDRO. QDRO’s must also address what happens when the alternate payee dies. An alternate payee’s ability to transfer his or her benefits to a third party at death similarly depends on the type of plan involved and the wording of the QDRO.

How long does the QDRO process take?

In the majority of cases, the process of obtaining a valid QDRO takes two to four months from the time the drafting of the order begins. The length of the process varies from case to case and depends on several factors, many of which are beyond the control of the preparer such as the amount of time it takes for the court to issue the QDRO or the time it takes for the plan administrator to formally approve the QDRO.

Who should prepare the QDRO?

Retirement plans and the rules governing them are complex and constantly changing. There are a variety of plans, each containing its own specific requirements and unique features. For a QDRO to be valid, it must meet specific requirements under the law and must be specifically tailored to the particular retirement plan. Although the need for QDRO’s arises out of a dissolution or separation, many family law attorneys refer their clients to an attorney specializing in drafting QDRO’s to ensure accuracy, reduce risk, and minimize cost.

Is a QDRO the only way to divide retirement plan benefits?

No. Recall that a QDRO is an order that directs the plan to pay money to the non-participant spouse. Alternatively, the parties could agree that the participant will pay or “buy-out” the alternate payee’s interest. To do this, the parties typically hire a pension actuary to perform a valuation. Generally, buyouts are agreed to prior to finalizing the Marital Settlement Agreement (MSA) or judgment.