Be Prepared for Your Next — or First — QDRO
With an estimated U.S. divorce rate in the 40% to 50% range, your retirement plan is likely to receive an order from a court directing the plan to split a participant’s benefits, also known as a domestic relations order. These orders entitle an “alternate payee” to a portion of your participant’s retirement benefits. However, it is up to the plan sponsor or administrator to determine whether the order is qualified, making it a qualified domestic relations order (QDRO). Even though it is issued by a government entity (the court), it must comply with your plan’s terms.
Spotting Common Errors
Here are some common reasons plan sponsors will fail to qualify a domestic relations order:
- Inappropriate Form of Requested Payment
This could occur, for example, if you have a defined benefit plan that does not allow for lump-sum distributions, but the order calls for one.
- Distribution Timing Request
The order might request an immediate distribution; however, your plan allows them to occur only when the participant reaches retirement age.
- Valuation Timing Issues
Suppose your defined contribution plan allows for the valuation of a participant’s vested benefits only on a quarterly basis. If the order calls for an immediate valuation of benefits so that a stipulated proportion (for example, 50%) of assets ultimately can be distributed to the alternate payee, you can reject the order.
- Fluctuations in Asset Values
If the order does not address an increase or decrease in the value of plan assets between the order’s date and the date of distribution, this could lead to subsequent confusion and disputes.
- Addressing the Prospect of Premature Death of an Alternate Payee
Your plan document might require that the order specify the implications of the death of an alternate payee before paying the retirement benefit. Thus, to be qualified, an order might, for example, stipulate that the benefit be payable to the deceased alternate payee’s estate.
Often, attorneys do not know the specifics of a plan, just that their client (or client’s spouse) has benefits under a plan. Therefore they may be sloppy when drafting domestic relations orders so that it does not identify your retirement plan correctly, such as by naming the custodian instead of the plan by its legal name. While an easy fix, the correction would need to be made before you could qualify the order.
If and when a domestic relations order is incompatible with your plan’s terms, the rules governing how to reject it are specific. ERISA’s rules are intended to give the alternate payee a reasonable opportunity to correct the errors. You must send notice of the rejection to the alternate payee (or payees) and the plan participant.
The notice must spell out:
- Your (or your administrator’s) reasons for rejecting the domestic relations order;
- Which specific plan provisions the order is incompatible with;
- Any deadlines your plan requires the order to satisfy; and
- Any missing information the order needs to have to qualify.
In general, ERISA requires that you be helpful in resolving any domestic relations order qualification issues. This includes using plain language so that your instructions are easily understood by everyone.
Getting it Right
Remember, a rejection is not necessarily final; whoever drafted the domestic relations order language will redraft it and submit it again, seeking qualification from the plan. Be sure to follow your plan document each time a domestic relations order is submitted.
For more information, contact Mike Kovacs or your ORBA advisor at 312.670.7444. Visit ORBA.com to learn more about our Employee Benefit Plans Services.