Qualified Domestic Relation Order (QDRO)

WHAT IS A QDRO

A QDRO (Qualified Domestic Relations Order) is a divorce order that provides instructions to a pension plan [or 401(k)] as to how to pay you your share of the benefits out of the plan. Because a QDRO applies to plans covered by Federal laws, your lawyer should draft your QDRO as a part of any agreement or Court ordered relief. In the case of Jordan v. Jordan the court discusses some important guidelines.

FREQUENTLY ASKED QUESTIONS

1. What is a QDRO?

A Qualified Domestic Relations Order (QDRO) is a court order that provides specialized instructions to a plan administrator as to how to pay a divorced spouse or child or other dependent (called alternate payees) all or a portion of a pension plan benefit. A QDRO may be used to divide the pension plan as a marital asset, or to pay alimony or child support (including prior missed payments). The specialized instructions must conform with Internal Revenue Service (IRS) regulations, be actuarially sound and must be acceptable to the plan sponsor.

2. What is a retirement plan?

Generally speaking, there are two types of pension plans: defined benefit plans and defined contribution plans. A defined benefit plan provides for a specified monthly benefit at retirement, which often is calculated based on years of employment and either a flat dollar multiplier or a percentage of average earnings. A defined contribution plan involves contributions to an account by the employee and/or the employer, which are invested in a variety of mutual funds and/or securities. Examples of defined contribution plans are 401(k) plans, 403(b) plans, 457 plans, employee stock ownership plans and profit-sharing or stock bonus plans. The account balance is generally paid upon retirement or separation from employment, or may be paid as the result of a QDRO.

3. After my divorce, must I wait until my spouse retires to receive a benefit?

Not necessarily. It depends on what the plan will allow. If a QDRO assigns a portion of a defined contribution account balance [e.g., 401(k)] to the divorced spouse, the plan may allow an immediate payment to the alternate payee, or may delay the payment until a future date, or may provide for periodic payments, or some combination of these alternatives. A defined benefit plan provides for monthly benefits to begin at a normal retirement age (such as 65), and often permits retirement at an "early retirement age", sometimes as early as the participant's age 50. Early retirement benefits involve a significantly reduced pension amount since the plan expects to pay the amount over a longer period of time, unless the plan provides for an "employer subsidy" such as unreduced early retirement benefits. It may be possible for a divorced spouse to receive benefits at the "earliest retirement age" even if the participant is still working.

4. I have a court-approved property settlement agreement, why do I need a QDRO?

A property settlement agreement generally does not contain all the details required by the IRS regulations pertaining to QDRO's, such as name, address and Social Security No. of each party, name of the plan, manner and period of time in which benefits are to be paid to the divorced spouse, how survivorship benefits are to be paid, etc. That's why a special order is usually required.

5. Is court-approval of my QDRO all that is needed for the order to be a QDRO?

No. A domestic relations order is not a Qualified Domestic Relations Order unless the order has been approved by the plan administrator and it is court-approved. If a court-approved order is not acceptable to the plan administrator, it must be revised until it is acceptable to the plan administrator and re-entered by the court. Many plan administrators will pre-approve a QDRO before it is entered by the court, which avoids the extra cost of re-entering the order by the court in the event revisions are necessary. Ask your attorney to have your QDRO pre-approved.

6. Is a QDRO required to divide all pension or 401(k) plans?

No. The term, "Qualified Domestic Relations Order", or "QDRO" refers to a special divorce order applicable to plans qualified pursuant to IRS regulations and covered by the Employee Retirement Income Security Act (ERISA). Many private-sector employers provide such plans to their employees. Plans applicable to those in the Military, or to those employed by the State or Federal government have rules similar to QDRO rules to divide pension plan benefits, however, benefits under such plans must be assigned by special court orders, often known by other names, such as COAP (Court Order Acceptable for Processing).

7. What kinds of provisions should I make sure are in my QDRO?

Several provisions you should look for in a defined benefit plan QDRO are provisions that allow you to receive your benefits before the plan participant retires, payments for your lifetime (where permitted), that describe what happens to your benefits if you or your spouse die before or after benefits commence, that allow you to be eligible for future benefit increases, and that allow you to share in employer subsidies (such as unreduced early retirement benefits). In a defined contribution QDRO, watch for employer contributions to a 401(k) plan which are made at year-end, but which cover the whole year. It may be appropriate to share such contributions, since they may apply to the period prior to divorce or separation. Where possible, your QDRO should specify that you share pro-rata in all funds and accounts, so that you share in both pre-tax and after-tax contributions, if applicable. These are just a few concerns.

8. My QDRO specifies that I am entitled to 50% of my former spouse's "vested" benefits, is that OK?

It is recommended that the term "vested" be avoided in a QDRO if it refers to your share of benefits as of a specific date, since a participant may be partially vested in a pension benefit accrued during the marital years, but may later become fully vested.

9. Can I receive a lump sum amount for the value of my share of my divorced

Generally, you can if your benefits are coming from a defined contribution plan, but not if your benefits are coming from a defined benefit plan. Most defined benefit plans will not permit a lump sum payment unless the "present value" of the monthly pension amount is very small. If a "present value" of the future pension benefits is calculated, you can accept other marital assets in exchange for your interest in the pension benefits, such as cash in a bank account or the value of a house, for example. But be careful -- if a "present value" of the monthly pension amount is not done properly, it may exclude such benefits as the value of employer subsidized pension benefits provided for in the plan. Further, the value of future pension enhancements or increases generally cannot be determined in advance, and you will probably lose out on these benefits if you exchange your pension rights for other marital assets.

10. What should I look for in dividing my former spouse's 401(k) plan account balance?

If there are any outstanding loans against the account balance, make sure your QDRO specifies whether the loan balance is to be included or excluded from your share of the account balance. For example, if your former spouse's account balance on 12/31/00 is $30,000 including a $10,000 loan balance, and you are assigned 50% of the account balance, your portion would be $15,000 if the loan balance is included, or $10,000 if the loan balance is excluded. The QDRO should also specify that the amount to be assigned to you will include earnings from the date of allocation (for example, date of separation or divorce) until the amount is set aside or distributed to you. Another concern is that some employers make annual contributions to accounts at the end of the calendar year. If the allocation date (the date your share is to be determined) occurs mid-year, your QDRO should specify that you are to receive a pro-rata portion of any end-of-year employer contributions.

11. How long does it take to process a QDRO?

The process involves preparing the order, submitting the order to the plan administrator for approval (before court approval), making any modifications required by the plan administrator and having the order signed by the court. The time it takes a plan administrator to approve the order and any modifications varies; however, the average completion time for the whole process is about three months. The timing of payment of benefits to the alternate payee depends on the terms of the plan.