Handling QDROs for Your Retirement Plan
When couples divorce, one spouse’s retirement benefits may be divided as part of a property settlement. Although federal law generally does not allow plan participants to assign or alienate their retirement plan interests, there is a limited exception. Retirement benefits may be assigned to a spouse, former spouse, child, or other dependent to satisfy family support or marital property obligations through a domestic relations order if the plan administrator determines it is a qualified domestic relations order (QDRO).
Knowing how the law defines “domestic relations order” is the first step in making a proper determination. A domestic relations order (1) is a judgment, decree, or order, including the approval of a property settlement agreement, (2) is made pursuant to state domestic relations law, and (3) relates to the provision of child support, alimony, or marital property rights to a spouse, former spouse, child, or other dependent of a plan participant (called “alternate payees”). A QDRO is a domestic relations order that creates or recognizes the existence of an alternate payee’s right to, or assigns to an alternate payee the right to receive, all or a portion of a participant’s plan benefits and that meets certain additional requirements.
A QDRO must contain the following information:
- The name and last known mailing address of the participant and each alternate payee
- Each retirement plan affected by the order
- The dollar amount or percentage of the benefit to be paid to the alternate payee or the method for determining the amount or percentage
- The number of payments or the time period to which the order applies
Certain Provisions Not Allowed
Before making a determination that a domestic relations order is qualified, the plan administrator must make sure that the order does not require the plan to provide any form of benefit, or any option, that is not otherwise provided for under the plan. Additionally, the order may not require the plan to pay an alternate payee benefits that are required to be paid to another alternate payee under a previous QDRO.
Your retirement plan should have written procedures for determining whether any domestic relations orders it receives are QDROs and for administering distributions pursuant to QDROs. When a domestic relations order is received, the plan administrator should promptly notify the plan participant and alternate payee that the order has been received and provide a copy of the QDRO procedures.
The procedures should describe any time limits for making a determination, which must be accomplished within a reasonable period after receipt of the order. Include the steps the administrator will take to protect and preserve retirement assets or benefits upon receipt of a domestic relations order. (Note that during the determination period, the plan administrator is required to separately account for the amounts which would have been payable to the alternate payee during such period.) The procedures should also describe the process for obtaining a review of the administrator’s QDRO determination.
As part of the procedures, a plan can include an explanation of the information the plan will make available to prospective alternate payees to assist with QDRO preparation, such as participant benefit statements and the summary plan description. According to the U.S. Department of Labor, a plan administrator may condition disclosure of this information on an alternate payee’s providing the plan with sufficient information to reasonably establish that the disclosure request is being made in connection with a domestic relations proceeding.
If an alternate payee is to receive a separate interest under a QDRO, the order may specify the time the alternate payee will receive the interest or assign to the alternate payee the same right the participant would have had under the plan with respect to payment timing. Either way, the QDRO may not provide for payment to be made to the alternate payee any earlier than the participant’s “earliest retirement age” (unless the plan permits payments at an earlier date).
Generally, a participant’s earliest retirement age is the earlier of two dates:
(1) the date on which the participant is entitled to a distribution under the plan or
(2) the later of either (a) the date the participant turns 50 or (b) the earliest date on which the participant could begin receiving benefits under the plan if the participant separated from service with the employer
The QDRO rules contain other details not covered in this broad overview. Since failure to follow proper QDRO procedures can have serious repercussions, including potential disqualification of your plan, you may want to review your plan’s procedures with a professional advisor to ensure that all bases are covered.