The division of marital property in a divorce is generally governed by state law. However, when a party in a divorce participates in an employer sponsored pension plan the division of the individual’s retirement benefit must comply with federal law. The Employee Retirement Income Security Act of 1974 (“ERISA”) was enacted in order to protect workers’ pensions and ensure that retirees had sufficient income, after retirement, throughout their lives. One important aspect was to also ensure that an individual’s retirement benefit could not be assigned or otherwise alienated. ERISA and the Internal Revenue Code anti-assignment and alienation provisions are strict; only a few exceptions to those rules are recognized. One such exception is a Qualified Domestic Relations Order (“QDRO”) which is a judgment, order or decree that recognizes a spouse, former spouse, child or other dependent’s interest in an individual’s retirement benefit.
A QDRO recognizes a spouse, former spouse, child or other dependent of a participant in a retirement plan as an alternate payee and assigns to that alternate payee an interest in all or a portion of an individual’s retirement benefit. Several requirements must be met so that a domestic relations order can be considered “qualified” and therefore recognized by the pension plan administrator as a QDRO.
While a domestic relations order does not need to be issued by a state court, it must be issued by a state agency with the authority to issue judgments, decrees or orders, or to approve property settlement agreements pursuant to state domestic relations law. In order to qualify as a QDRO a domestic relations order must also contain the following information: 1) the name and last known mailing address of the participant and the alternate payee, 2) the name of each plan to which the order applies, 3) the dollar amount or percentage of the benefit that will be paid to the alternate payee, and 4) the number of periods or the time period to which the order applies.
A QDRO may not require a plan to do the any of the following: 1) provide an alternate payee or participant with any type or form of benefit, or any option, not otherwise provided under the plan, 2) require a plan to provide for increased benefits, 3) pay benefits to an alternate payee that are required to be paid to another alternate payee under another order previously determined to be a QDRO, or 4) require a plan to pay benefits to an alternate payee in the form of a qualified joint and survivor annuity for the lives of the alternate payee and his or her subsequent spouse.
Once the parties in a divorce proceeding agree to the division of a retirement benefit, a domestic relations order is drafted by an attorney and submitted to the pension plan’s Plan Administrator for review. The Plan Administrator reviews the order to ensure that it complies with federal law and the pension plan’s own QDRO procedures. The Plan Administrator will then determine whether the order meets all of the requirements and notify all parties. Sometimes the Plan Administrator will suggest some changes to the order. Once the order is satisfactory, it may be submitted to the court for execution. When the final order has been executed by the court, it must be submitted to the pension plan in order to be recognized as a QDRO.
Types of Pension Plans
If you are drafting or simply reviewing a QDRO, it is important to determine the type of pension plan that is the subject of the QDRO. Pension plans generally fall into two categories: defined benefit or defined contribution plans. A defined benefit plan is a retirement plan in which the employee is promised a specific benefit amount upon retirement, usually in the form of an annuity for life. In a defined benefit plan, the employer bears the responsibility of funding the plan. Meanwhile, in a defined contribution plan, the employee has an individual account and is responsible for funding the account usually via monthly contributions. Often, employers will match up to a specific percentage of an employee’s contributions to the account, but they are not required to do so. Upon retirement, the employee typically receives the entire account balance in one lump sum payment although some defined contribution plans may offer annuities.
The attorney drafting the QDRO will consider the participant’s specific circumstances and decide upon the best method for dividing the retirement benefit. For either type of pension plan, the retirement benefit may be divided pursuant to the QDRO by using a separate interest or shared payment approach. A separate interest approach essentially severs the benefit so that the participant and the alternate payee each receive a distinct benefit. The alternate payee is able to select the payment start date (so long as it occurs after the participant is eligible to begin receiving payments). Most importantly, payments to the alternate payee are based upon his or her lifetime and will continue after the death of the participant.
Under a shared payment approach, meanwhile, the alternate payee receives a portion of the participant’s benefit. The alternate payee may only begin receiving payments after the participant has already started receiving payments. Upon the death of the participant, payments to the alternate payee end.
Another feature that should be considered is whether the alternate payee will be entitled to any survivor benefits upon the death of the participant. Pension plans are required to provide survivor benefits to a participant’s spouse. This ensures that the spouse will continue to receive a portion of the benefit payments after the participant has died. If the participant and spouse are divorced before the participant retires and begins receiving benefit payments, then the spouse is no longer entitled to receive any survivor benefits. A QDRO is the only way to ensure that a former spouse is considered by the pan to be the participant’s surviving spouse for purposes of any survivor benefits which may be payable. This is especially important for a QDRO that is based upon a shared payment formula. Under a shared payment formula, once the participant dies the alternate payee no longer receives payments. Designating the alternate payee as the surviving spouse offers a measure of protection in the event the participant predeceases the alternate payee.
For additional information about QDROs practitioners should consult the U.S. Department of Labor Employee Benefits Security Administration, which publishes guidance relating to various ERISA topics including Qualified Domestic Relations Orders.