QDROS Are Easy

Seriously, QDROS Really Aren't That Complex

What is a QDRO?

QDRO is an acronym for "Qualified Domestic Relations Order." We will explore the substance of that soon.

"Domestic Relations" is an area of law that deals with marital relationships such as marriage, separation, divorce, or annulment. When two people divorce under a state's domestic relations law, also called "family law," a state court judge signs a document called an "Order" that gives formal, enforceable life to the terms and conditions of the divorce, including how property is to be divided between spouses. Retirement benefits are one type of property that can be divided between divorcing spouses.

There are three actors involved in dividing retirement benefits:

Plan Administrator

The person or company that manages the retirement plan on behalf of the sponsoring employer

Participant

The person who worked for the sponsoring employer and who earned the retirement benefits being divided

Alternate Payee

The person, other than the Participant, who is going to receive a share of the retirement plan benefits as part of the division of the spouses' property

Here's an example: Let's say Harold and Wanda were married. During the marriage, Harold worked for Enterprise Rent-a-Car. Enterprise Rent-a-Car sponsored a 401(K) plan that Harold contributed money to every month. Enterprise Rent-a-Car knows a lot about renting cars, but they don't know a thing about managing retirement plans. Rather than run the risk of violating the Employment Retirement Income Security Act of 1974 (ERISA), Enterprise hires Platinum Financial to keep track of everything that must be tracked when a company offers a retirement benefit plan. Now, Harold and Wanda decide to divorce and they agree that Wanda will be entitled to half of Harold's 401(K) benefits. How do they transfer half of Harold's 401(K) money to Wanda without Harold or Wanda having to pay taxes on the transfer?

In this example, Platinum Financial is the plan administrator, Harold is the Participant, and Wanda is the Alternate Payee. Someone needs to draft a domestic relations order that legally recognizes the alternate payee's right to receive a portion of the participant's retirement benefits and instructs the plan administrator in dividing the plan between husband and wife. That's the role of a special breed of domestic relations order, or DRO.

In 1974, Congress and the President enacted the Employee Retirement Income Security Act (ERISA, 29 U.S.C. 18) to establish a regulatory framework for pensions and certain insurance benefit programs. Family law attorneys, also known as domestic relations law attorneys, most often come into contact with ERISA when trying to divide a 401(K) defined contribution plan or traditional pension defined benefit plan between divorcing spouses. A DRO that divides an ERISA-governed retirement benefit plan must meet the requirements of ERISA in order to qualify as an order that can be used to divide such a retirement plan.

So what is a QDRO? It is a (Qualified) (Domestic Relations Order) that recognizes an alternate payee's right to receive part of a participant's retirement benefits and which instructs the plan administrator in how to effect the division of the retirement plan benefits between spouses. (Just so you know, an alternate payee can be a spouse, former spouse, child, or other dependent of the participant.) ERISA § 206(d)(3)(K); IRC § 414(p)(8).

4 Steps to Qualifying as a Domestic Relations Order under ERISA

In order to qualify under ERISA, a domestic relations order that divides a retirement plan must contain the following information:

1. The name and last known mailing address of the participant and each alternate payee;
   
2. The name of the plan to which the order applies;
   
3. The dollar amount or percentage of the retirement benefits to be paid to the alternate payee (or a specific, certain method for calculating or determining the dollar amount or percentage); and
   
4. The number of payments to be made or the time period to which the order applies.
   

26 U.S.C. § 414(p)(2)(A). So, the simplest QDRO would read something like this:

DOMESTIC RELATIONS ORDERDefinitions and identities of the parties:

1. Plan Name: ENTERPRISE RENT-A-CAR EMPLOYEE SAVINGS PLAN
2. Plan Administrator: Plantinum Financial, 55 Wall Street, New York, NY.
3. Participant: Harold, 444 Elm Street, Plano, Texas 75075
4. Alternate Payee: Wanda, 123 Main Street, McKinney, Texas 75070

IT IS ORDERED that Alternate Payee is entitled to receive fifty percent of Participant's benefits which accrued under ENTERPRISE RENT-A-CAR EMPLOYEE SAVINGS PLAN beginning on July 1, 2000 and ending on and including September 9, 2016, which sum shall be distributed in a single payment to Wanda.

Don't be crazy and copy the above example as your QDRO. Although it does meet all of ERISA's requirements, it does not cover some common contingencies which should be covered in every QDRO, such as how to allocate any fee charged by the plan administrator and what to do if either the participant or alternate payee dies AFTER the order is signed but BEFORE the benefits are paid to the alternate payee.

3 Ways to Prevent Your DRO from Becoming a QDRO

Once you've carefully crafted your DRO, you should send it for a pre-determination review by the plan administrator. The plan administrator MUST REJECT the proposed DRO if it does any of the following:

1. Requires the plan to provide any type or form of benefit, or any option, not otherwise provided under the plan;
2. Requires the plan to provide increased benefits (determined on the basis of actuarial value); or
3. Requires the payment of benefits to an alternate payee which are required to be paid to another alternate payee under another order previouslydetermined to be a qualified domestic relations order.

Summary

Meeting the minimum requirements of a QDRO is not difficult or complicated. Simply identify the parties, the plan, and the amount & method of distribution and DO NOT require the plan to pay out more than it otherwise would, and you have a valid QDRO.