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This article provides a basic overview of qualified domestic relations orders (QDROs) relating to the division of benefits under employer-sponsored retirement plans.
Separation, divorce, and other domestic relations proceedings may impact a participant’s interest in an employer-sponsored qualified plan. While the division of marital property is generally governed by state domestic relations law, any assignments of retirement plan benefits must also comply with federal law, including the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (Code). The specific rules relating to qualified domestic relations orders (QDROs) are contained in ERISA Section 206(d)(3) (29 U.S.C. § 1056(d)(3)) and Code Section 414(p) (26 U.S.C. § 414(p)).
This Practice Note explains:
- How to determine if a domestic relations order (DRO) is qualified.
- The types of information that may and may not be included in a QDRO.
- The duties of plan administrators in relation to QDROs, and the actions they must take before, during, and after the review process.
For more information, see the following resource from the Department of Labor (DOL) website: QDROs: The Division of Retirement Benefits Through Qualified Domestic Relations Orders.
QDROs Enable Retirement Plans to Be Divided
In general, ERISA and the Code do not permit a participant to assign or alienate the participant’s interest in a retirement plan to another person. These anti-assignment and alienation rules aim to ensure that a participant’s pension benefits are actually available to provide financial support during the participant’s retirement years. One of the limited exceptions to the anti-assignment and alienation rules allows a participant’s interest in a retirement plan to be assigned to an alternate payee under a QDRO. An alternate payee is a spouse, former spouse, child, or other dependent of a participant who is recognized by the order as having a right to receive all, or a portion of, the participant’s benefits payable under a plan. The plan administrator of the retirement plan determines whether a DRO qualifies as a QDRO.
On June 26, 2015, in Obergefell v. Hodges, the US Supreme Court ruled that same-sex couples may exercise the right to marry in all states and that a state may not refuse to recognize a lawful same-sex marriage performed in another state. This decision came two years after the Supreme Court’s decision in United States v. Windsor, which defined spouse to include same-sex spouses for purposes of federal law. Therefore, if a couple is or was lawfully married under state law, a same-sex spouse or same-sex former spouse can be an alternate payee under a QDRO. However, if the couple divorced before June 26, 2013 (the date Windsor was decided), whether the former spouse can be an alternate payee depends on the plan and how it is interpreted. (See Obergefell v. Hodges, 135 S. Ct. 2584 (2015); United States v. Windsor, 570 U.S. 744 (2013).)
Types of Plan Benefits That Can Be Divided
Under the Code and ERISA, a QDRO can divide benefits under the following types of retirement plans:
- Defined benefit plans, such as pension plans and cash balance pension plans.
- Defined contribution plans, such as 401(k), profit-sharing, stock bonus, employee stock ownership, and money purchase plans.
The following plans are not subject to the QDRO rules under the Code or ERISA, but benefits under these plans may be divided by a qualifying court order that satisfies the specific and distinct legal requirements particular to each of the plans:
- Government-sponsored pension plans.
- State-sponsored pension plans.
- Military retired pay plans.
- Railroad pension plans.
- Church plans.
Executive compensation plans are also not subject to the QDRO rules under the Code or ERISA. However, many of these plans adopt similar procedures for the division of benefits on divorce.
Identifying a DRO
- Relates to the provision of child support, alimony payments, or marital property rights to an alternate payee.
- Must be issued by an agency, generally a court, with authority over the proceeding under a state or tribal domestic relations law (including a community property law).
The DRO can be:
- A separate judgment.
- A divorce or dissolution decree assigning marital property rights.
- An alimony or child support order.
- A temporary order regarding payment of benefits during a divorce or custody proceeding.
- A property settlement agreement formally approved by a state authority.
The plan administrator will deem a DRO qualified if it meets certain legal and plan requirements (see Determining Whether a DRO is Qualified, below).
Determining Whether a DRO is Qualified
A QDRO is a DRO that creates or recognizes 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 participant’s benefits under an employer-sponsored retirement plan. The DRO becomes a QDRO after the plan administrator reviews it and determines that it complies with ERISA, the Code, and the terms of the applicable retirement plan.
Changes under the Pension Protection Act of 2006 and final regulations issued by the DOL clarified the circumstances under which a DRO may be considered a QDRO even if the order:
- Is issued after another DRO.
- Revises another DRO.
- Is issued following the death, divorce, or annuity starting date of a participant.
(29 C.F.R. § 2530.206.)
The plan administrator does not need to go further than determining whether a DRO is qualified. Therefore, the plan administrator is not required to determine the validity of the DRO. For example, the plan administrator does not need to decide whether the issuing court has proper jurisdiction over the matter, whether state law was correctly applied, or other issues of state domestic relations law. The plan administrator is also not required to determine or verify whether the proper amount of benefits is assigned to the alternate payee by the court.
Information That Must Be Included in a QDRO
In order to be qualified, a DRO must include the following information:
- The name and last known mailing address of the participant and each alternate payee.
- The name of each retirement plan to which the order applies.
- The dollar amount or percentage (or the method of determining the amount or percentage) of the benefit to be paid to the alternate payee.
- The number of payments or time period to which the order applies.
For administrative purposes, the order may contain the participant’s and the alternate payee’s social security numbers and dates of birth. However, this information may be provided separately. In addition, the DOL has stated that a plan administrator should not reject a domestic relations order if the only defect relates to factual identifying information within the plan administrator’s knowledge (such as the proper name of the plan) or easily obtained through a simple communication with the alternate payee or the participant (such as a participant’s address).
Information That Must Not Be Included in a QDRO
The order must not require the plan to:
- Provide an alternate payee or participant with any type or form of benefit, or any benefit option, not provided for under the plan.
- Provide for increased benefits (determined on the basis of actuarial value).
- Pay benefits to an alternate payee that are required to be paid to another alternate payee under an earlier QDRO.
- Pay benefits to an alternate payee in the form of a joint and survivor annuity for the lives of the alternate payee and their subsequent spouse.
- Pay benefits as a separate interest (see Other Specific Provisions to Be Addressed, below) to the alternate payee if the participant is already receiving benefit payments.
- Change the benefit form if the participant is already receiving benefit payments, unless the plan specifically permits such changes.
Other Specific Provisions to Be Addressed
In addition to the information that must be identified in the order (see Information That Must Be Included in a QDRO, above), certain provisions should be included in the order for clarity and to properly divide the benefits under different types of retirement plans.
Defined Benefit Plans
For a defined benefit plan, the order should include a statement as to whether the benefits are to be divided as a separate interest or shared interest.
- Separate interest. A QDRO that creates a separate interest divides the participant’s benefits into two separate parts: one for the participant and one for the alternate payee. Subject to the terms of the plan, the QDRO may provide that the alternate payee can determine the form in which their benefits are paid and when benefit payments begin.
- Shared interest. Under the shared payment approach, benefit payments from the plan are split between the participant and the alternate payee. The alternate payee receives payments only when the participant receives payments. This is also referred to as a “stream of payments.”
In addition, the order should address the following:
- The specific dollar amount or percentage awarded to the alternate payee.
- The beginning date and the number of payments or period of time during which shared payments are to be made to the alternate payee.
- A statement that the alternate payee may be given the right to begin benefits at any time (but not before the participant’s earliest retirement age).
- A statement that the benefits payable to the alternate payee will be paid in any form available to the participant, except in the form of a qualified joint and survivor annuity with the alternate payee’s subsequent spouse as the survivor.
- The extent of any survivorship rights that the alternate payee retains in the event of the participant’s death.
- Information regarding the alternate payee’s entitlement to employer-provided early retirement subsidies and supplements (if any are provided under the plan).
- Instructions regarding the division of any future increases in the participant’s post-retirement benefit (if applicable).
- A statement that the alternate payee may not designate a beneficiary (unless otherwise provided under the plan).
- Instructions regarding what happens to the benefit in the event the alternate payee dies before payment of the benefit. For example, if the alternate payee dies before payment, instructions as to whether the benefit is paid to the alternate payee’s beneficiary (if the plan permits), the alternate payee’s estate, or if the benefit reverts to the participant.
Defined Contribution Plans
For a defined contribution plan, the order should include:
- A provision describing any crediting of investment gains and losses.
- The method for allocating the alternate payee’s benefits from among the participant’s various investments under the plan (if applicable).
- Any outstanding loan’s impact on calculating the alternate payee’s benefit.
- Instructions regarding what happens to the benefit in the event the alternate payee dies before payment of the benefit.
Normally, the alternate payee pays the appropriate federal income taxes and applicable state taxes on a QDRO distribution. However, if the QDRO awards benefits to a child or other dependent, the participant pays the appropriate federal income taxes and applicable state taxes on the distribution.
Plan Administrator’s Role
Under federal law, the administrator of the plan is responsible for determining whether a DRO is a QDRO. As a plan fiduciary, the plan administrator is required to perform its duties, including making a QDRO determination, prudently and solely in the interest of plan participants and beneficiaries. In addition, the plan administrator must comply with specific requirements applicable to the division of retirement plan benefits. If a valid QDRO is not honored or if an invalid DRO is honored, the plan administrator could face liability in connection with the incorrect determination.
Plan Administrator’s Role Before Receipt of a DRO
Before a DRO is received, the plan administrator should take the actions below.
Establish QDRO Procedures
Under the Code, all retirement plans must establish reasonable procedures for determining the qualified status of a DRO (QDRO procedures).
The QDRO procedures must:
- Be reasonable.
- Be in writing.
- Provide that each person entitled to benefits under the DRO will be notified (at the address specified in the DRO) of the retirement plan’s QDRO procedures.
- Permit an alternate payee to designate a representative for receipt of notices sent with respect to the DRO.
In addition, the QDRO procedures may:
- Explain the plan and benefit information (such as summary plan descriptions (SPDs), plan documents, individual benefit statements, and model QDRO) that is available to assist in preparing QDROs.
- Describe any time limits set by the plan administrator for making determinations.
- Explain the steps the plan administrator will take to protect and preserve plan assets or benefits on receipt of a DRO.
- Describe the process for appealing the plan administrator’s determination as to whether an order is a QDRO.
- Describe what happens in the event of the death of the participant and alternate payee.
- Describe the treatment of earnings and losses in defined contribution plans if the QDRO is silent.
- Describe the treatment of loan balances.
- Describe the treatment of a posthumous or nunc pro tunc QDROs (QDROs entered after the death of a party before the QDRO is prepared or because of death prior to the judgment of dissolution).
The plan administrator should recognize the existence of QDRO procedures within the plan document and SPD.
Prepare a Model QDRO
Many plan administrators also find it useful to prepare a model QDRO for the plan. Although not technically required, the model assists participants and alternate payees in preparing DROs and helps to reduce drafting errors. It also reduces the time and expense incurred by the plan administrator in determining the qualified status of the order and expedites the DRO approval process. The model QDRO is not meant to be a substitute for expressing the parties’ intent or the negotiated terms of a separation agreement regarding the division of the participant’s plan benefits. The parties and their legal counsel are responsible for ensuring that the terms of the applicable QDRO reflect their intent. Therefore, the model QDRO should be modified to the extent necessary to reflect the intent. Modified provisions must not violate the terms of the plan.
Plan Administrator’s Role in Response to Inquiries
On inquiry by a participant or prospective alternate payee (or their designated representatives) for relevant information in connection with a domestic relations proceedings, the plan administrator should:
- Confirm that the participant has benefits payable under the plan.
- Provide a copy of the QDRO procedures and any plan information relevant to drafting a QDRO, including the model QDRO if one is available.
- Ensure that there is an external contact to handle QDROs. The name of this individual should be included in the SPD.
- Place a hold on the participant’s account (see Place a Hold on the Participant’s Account, below).
- Remove a hold on the participant’s account after a specific period of time (see Remove a Hold on the Participant’s Account, below).
- Maintain proper files, including a copy of the QDRO and all correspondence.
Place a Hold on the Participant’s Account
The plan administrator should place a hold on the participant’s account under the plan for a reasonable period of time determined by the plan administrator (for example, six months) before receiving a DRO.
A hold is only justified if the plan administrator receives a notice from the participant, the alternate payee, or their designated representatives. The notice must indicate that:
- A QDRO is being sought.
- A DRO is imminent.
- The participant’s interest in the plan will be the source of payment under the DRO (if determined to be qualified).
The types of documents that provide sufficient notice that a QDRO is being sought include:
- A notice of issuance of a stay.
- A joinder or a restraining order prohibiting disposition of the participant’s benefits under the plan pending issuance of a DRO.
- A subpoena requesting information about a participant’s benefits for purposes of drafting a QDRO.
The hold becomes effective as soon as administratively feasible after the plan administrator receives notice, and has one of the following consequences:
- Defined contribution plans. When a hold is placed on a participant’s account under a defined contribution plan, the participant may not take a withdrawal, distribution, or a loan from the plan to the extent that such withdrawal, distribution, or loan may involve benefits in dispute under a pending DRO. The plan administrator should follow the terms of the plan’s loan policy when imposing a hold on plan loans.
- Defined benefit plans. When a hold is placed on a participant’s account under a defined benefit plan, the participant is restricted from beginning their retirement benefits payable under the plan.
Additionally, a court may order a hold on the participant’s account that the plan administrator must enforce.
Remove a Hold on the Participant’s Account
A hold should be removed if the plan administrator does not receive a DRO within a specified period of time, to be determined by the plan administrator (for example, six months). If the administrative hold is removed due to inactivity, a QDRO can be pursued at a later date.
Alternatively, the plan administrator should remove an administrative hold on receipt and review of any of the following:
- A court certified copy of a court order (including a dissolution of marriage, final decree of divorce, or a property settlement agreement incorporated into such order) that clearly states that the alternate payee has waived their spousal rights to benefits, and includes all other information required in a QDRO to the extent applicable.
- An executed and notarized waiver of benefits from the alternate payee.
- A complete original or court certified copy of a court order lifting any restriction pertaining to the division of benefits.
- A complete original or court certified copy of an executed DRO that is determined to be qualified.
Removal of the hold does not imply that the alternate payee is waiving their rights to any portion of the participant’s retirement benefits.
Plan Administrator’s Role on Receipt of a DRO
On receipt of a DRO, the plan administrator should take the actions below.
Notify the Affected Participants and Payees
The plan administrator must promptly notify the affected participant and each alternate payee named in the order (or their designated representatives) that:
- The DRO has been received.
- A determination as to the qualified status of the DRO will be made in accordance with the plan’s QDRO procedures.
- The participant and any alternate payee will be notified of the plan administrator’s determination with respect to the DRO.
- A copy of the QDRO procedures is included (if the procedures have not already been sent).
Place a Hold
The plan administrator should promptly place a hold on the participant’s account (if not already placed, see Place a Hold on the Participant’s Account, above). During the period in which the status of a DRO is being determined, the plan administrator must separately account for the amounts that would be payable to the alternate payee under the terms of the order, if the DRO were determined to be qualified. These amounts may not be distributed to the participant or any other person.
The plan administrator must preserve the segregated amounts only for an 18-month hold period. After the DRO has been received, the 18-month hold period begins after the first date that the DRO would require payment to the alternate payee.
If the DRO is not resolved within the 18-month hold period or if the plan administrator does not otherwise receive at least one of the items required to remove a hold, the plan administrator may remove the hold on the participant’s account (see Remove a Hold on the Participant’s Account, above).
Determine Whether the DRO Is a QDRO Within a Reasonable Period
The plan administrator must determine whether the DRO is a QDRO within a reasonable period of time after receipt of the DRO and promptly notify the participant and each alternate payee of the determination. A reasonable period of time depends on the facts and circumstances. If a DRO is simple and clearly complete, it should take less time to review than one that is incomplete or unclear.
The notices must be provided within a reasonable time consistent with the plan’s procedures. Due to COVID-19, the deadline for providing certain notices may have been extended. The COVID-19 national emergency ended on April 10, 2023.
The plan administrator must:
- Determine if the DRO is a draft order or an executed or filed order. If the order is a draft order, the plan administrator reviews the order so that any failures can be corrected before the DRO is executed by the court. Reviewing drafts and providing feedback can help to ensure that the QDRO conforms to the terms of the plan and can save the plan time and money in its review. If the order is an executed or filed order, the plan administrator reviews the order for qualification status.
- Within a reasonable period of time, review the DRO and determine whether it satisfies the requirements of the Code, ERISA, and the terms of the retirement plan (see Determining Whether a DRO is Qualified, above).
- Once reviewed, notify the participant and the alternate payee (and their designated representatives) of the determination. If the DRO is determined qualified, the notice will set out the interpretation of the QDRO regarding amount, time, and form of distribution.
- If the DRO is determined not to be qualified, the notice sets out in an easily understood manner:
- the specific reason(s) for the rejection;
- the specific reference to pertinent provisions of the plan or order on which the denial is based;
- an explanation of any time limits on the parties’ rights; and
- a description of any additional material that is necessary for the DRO to become a QDRO and an explanation of why such material is needed.
The plan administrator may also wish to consider providing a draft version of the QDRO to show the required revisions.
The plan administrator may incorporate an appeal period allowing the parties to dispute the determination, in writing, within a period of time determined by the plan administrator (for example, 30 or 60 days). If an appeal has not been received within the designated period of time, the QDRO will be administered in accordance with the terms of the QDRO. To expedite the process, the parties can execute a waiver that waives the appeal period.
If the DRO relates to a defined contribution plan, the plan administrator may assess reasonable expenses incurred in determining whether the DRO is qualified against the participant’s account. In doing so, the plan administrator should review the plan provisions governing allocation of expenses to ensure that these expenses may be paid from plan assets. Employers should also review the DOL’s Field Assistance Bulletin 2003-3, which provides guidance on the rules that apply for allocating expenses among plan participants in a defined contribution plan.
Plan Administrator’s Role in Ongoing QDRO Administration
The plan administrator should track the status of each DRO and periodically audit the status of approved QDROs to ensure compliance.
The plan administrator must act in accordance with the provisions of each QDRO as if it were a part of the plan. For example, if the plan gives the participant the right to elect the form in which benefits are paid and the QDRO gives the alternate payee the same right, the plan administrator must permit the alternate payee to exercise that right.
If the QDRO is approved before the first date on which benefits are payable to the alternate payee, the plan administrator must continue to account for and protect the alternate payee’s interest in the plan until the earliest date payable under the QDRO.
On the alternate payee’s written request, the plan administrator must provide copies of certain plan documents, such as an SPD and the latest Form 5500 (annual report). When the alternate payee begins receiving payments, the plan administrator must treat the alternate payee as a beneficiary receiving benefits and must automatically provide the information to which beneficiaries are entitled.
This article originally appeared in Thomson Reuters Practical Law. © 2023 by Thomson Reuters. Thomson Reuters is a Sponsor of the GPSolo Division, and this article appears pursuant to the Division’s agreement with them. This article is not an endorsement by the ABA or the Division of any Thomson Reuters product or service.
Reprinted with permission in GPSolo eReport, Volume 13, Number 2, September 2023. © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association or the Solo, Small Firm and General Practice Division.