QDRO Overview

What is a Qualified Domestic Relations Order ("QDRO")?

A QDRO is:

1. A domestic relations order ("DRO")(see below for definition)
2. That creates or recognized 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 qualified retirement plan and
3. That includes certain information and meets certain other requirements.

A DRO is:

1. A judgment, decree or order (including the approval of a property settlement agreement)
2. That is made pursuant to state domestic relations law (including community property law and
3. 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 a participant.

The plan administrator determines whether a QDRO is qualified.

What are the Requirements of a QDRO?

For a domestic relations order to be considered qualified, it must meet the requirements of Internal Revenue Code Section 414(p) and provide the following:

1. Name and last known mailing address of the participant.
2. Name and last known mailing address of the Alternate Payee.
3. Amount or percentage of the participant’s benefit to be paid by the plan to each Alternate Payee or the manner in which such amount or percentage is to be determined.
4. Number of payments or period to which such order applies.
5. Plan to which the order applies.
6. That the QDRO relates to the provision of child support, alimony, or marital property rights to a spouse, former spouse, child or dependent.
7. That the QDRO is made pursuant to state domestic relations law.

The QDRO must also not require the following:

1. The plan to provide any type or form of benefit or option not otherwise available under the plan.
2. The plan to provide increased benefits.
3. The payment of benefits to an Alternate Payee that are required to be paid to another Alternate Payee under another order previously determined to be a QDRO.

These limited requirements do not protect the alternate payee. If the QDRO does not say it, the alternate payee does not get it.

Types of Qualified Plans Subject to QDROs

Qualified retirement plans generally fit into one of two categories:

1. Defined contribution plans.
2. Defined benefit plans.

Defined contribution plans.

• Individual participant accounts.
• Benefits based solely on contributions and any investment experience and forfeitures thereon.
• Pre or post tax contributions.
• Some plans such as a money purchase plan have attributes of both defined contribution and defined benefit plans. Such a plan requires additional survivorship protections not generally required in defined contribution plans.

• A plan other than an individual account plan.
• Generally no individual participant accounts.
• Retirement benefits must be definitely determinable.
• Employer bears the investment risk over the years to fund the benefit.
• Some plans such as a cash balance plans have attributes of both defined contribution and defined benefit plans. Such a plan might allow lump sum rollovers, but the QDRO must be drafted to allow for same.
• Calculation of benefits based on a formula. Formulas generally involve:
• Earnings
• Age
• Years of credited service

Plans that are Not Subject to ERISA/QDRO Provisions

• Governmental plans.
• Church plan.
• Individual Retirement Accounts (IRAs).
• SEP.
• Some deferred compensation plans.

Plans that are not subject to ERISA/QDRO provisions can still accept and/or require QDROs to divide retirement accounts.

How Can Benefits be Divided Pursuant to a QDRO?

• Shared approach
• Separate approach

Under either approach, the Alternate Payee will receive the assigned share but will have different available options and as an Alternate Payee is considered to have the same or similar rights as a Participant.

For example:

If a QDRO is drafted for a defined benefit plan and provides for a shared approach, the Alternate Payee cannot chose the form of benefit and/or the commencement date. Under the separate approach, although an Alternate Payee can only commence benefits on or after the participant’s earliest retirement age, Alternate Payee can chose the form of benefit and the commencement date. Alternate Payee has more flexibility under the separate approach.

There are benefits and/or disadvantages under both approaches depending upon the circumstances of each case. Survivorship benefits are drafted differently under each approach.

Survivorship Benefits

Without survivorship benefits, an Alternate Payee can lose a portion of or the entire benefit entitlement. Although Federal law requires each plan to have spousal survivorship benefits, a divorced spouse is not a spouse unless designated as such via a QDRO.

There are two basis types of death benefits under qualified ERISA plans:

• Qualified Pre-retirement Survivor Annuity (QPSA).
• Required under a shared or separate approach.
• Qualified (Postretirement) Joint and Survivor Annuity (QJSA).
• Required under a shared approach.

In order to provide survivorship coverage to a former spouse, the language must be included in the QDRO. If the QDRO does NOT include survivorship benefits, the Alternate Payee may lose rights to any benefits upon death of the Participant or may not be able to assign their remaining benefits to a beneficiary.

Coverture Fractions

How to determine the marital portion of benefits under Defined Benefit & Certain Defined Contribution Plans.

• Frozen Coverture.
• Non-Frozen Coverture (Majauskas/Marx).

Frozen Coverture Fraction

You begin with the monthly benefit due as of date of complaint. The marital portion is this monthly benefit multiplied by the following frozen coverture.

The numerator is the same under the Frozen and Non-Frozen.

The numerator is always the total time Participant is married and a participant in the plan (the date of marriage - or date of participation in plan if participation begins after date of marriage) through the date of complaint.

The denominator is the total time in the plan until the end of the marriage (date of participation through date of complaint).

Non-Frozen Coverture (Majauskas Formula)

You begin with the monthly benefit due as of date of cessation of benefits, retirement of either party or termination. The marital portion is this monthly benefit multiplied by the following non-frozen coverture.

This fraction is used to protect the growth on Alternate Payee’s assigned share.

The numerator is the same under both the Frozen and Non-Frozen.

The numerator is always the total time Participant is married and a participant in the plan (the date of marriage - or date of participation in plan if participation begins after date of marriage) through the date of complaint.

The denominator is the total time in the plan through the cessation of benefits, retirement or termination (date of participation until cessation of benefits, retirement or termination).

Identifying Benefits

• Obtain notarized release from Participant.
• Request:
• W-2 summary of earnings for several years.
• Plan documents/summary plan descriptions.
• Benefit statements.
• Contact plan administrator.
• Be persistent.
• Subpoena records if necessary.
• Benefits for each person depends on position, possible performance.

Critical Issues

What can affect former spouse’s rights?

• Participant’s change in marital status.
• Death of Participant.
• Retirement of Participant.
• Disability of Participant.
• Tax issues if there is an offset.
• Clarity in Property Settlement Agreement.
• Are several plans being equalized and how do the parties intend to effectuate.
• Value all plans as of date of complaint and divide.
• Value all plans as of date of complaint plus investment experience on the marital portion and then divide.

Issues for Defined Contribution Plans

• Date of Valuation.
• Investment experience.
• Survivorship protection.
• Will balance be rolled-forward from date of cut-off to present for investment experience on marital portion?
• Will benefit be rolled over into a qualified plan or IRA w/out tax consequences or will there be a withdrawal.
• Vesting issues.

Issues for Defined Benefit Plans

• Coverture fraction.
• Survivorship protection.
• Post retirement increases and other economic increases (i.e. Early retirement subsidy, cost of living adjustments, etc.).
• DBP plans are generally valued using actuarial assumptions.
• Retirement benefit based on formula defined by plan.
• Federal employees do not contribute to or receive social security benefits.
• Any purchase of additional service credit and is it marital.
• Does plan pay lump sum benefits.
• Once participant retires, he cannot change his options!

How to Protect Clients

• Determine what type of plan is being valued.
• If necessary obtain a release from Participant to get information directly from the plan.
• If the parties intend to transfer funds from a retirement account to a party be sure that the plan allows for same. For example, do not agree to transfer a lump sum from a traditional defined benefit plan as this cannot be accomplished and creates post judgment issues.
• Notify plan administrator that spouse has adverse claim and request a restrictive hold be placed on Participant’s account.
• Be more detailed and/or specific in the PSA.
• Prepare and file QDRO as soon as possible.
• Know your client (i.e. immediate offset, annuity, etc.).

Did you know that:

There is no requirement that both parties to a marital proceeding sign or otherwise endorse or approve a Domestic Relations Order ("DRO").

Alternate Payee’s who are involved in domestic relations proceedings are entitled to access the plan and participant benefit information (such as summary plan description, relevant plan documents, statement of participant’s benefit entitlements) sufficient to prepare a QDRO before submission of a DRO. However, the plan administrator may condition disclosure on a prospective Alternate Payee providing sufficient information to reasonably establish that the request is being made in connection with a domestic relations matter.