QDRO Preparation Process 101
An Introduction to QDRO Preparation
A Qualified Domestic Relations Order, or QDRO, springs from ERISA §206(d). It is a specific type of order issued by a court, though it can also be issued by a state agency with the authority to do so. It is a “Domestic Relations” Order (DRO) because it relates to family law, usually divorce, and it “orders” a retirement plan to divide benefits as part of a divorce settlement. The order earns its “Qualified” status and goes from a “DRO” to a “QDRO” when the retirement plan administrator accepts the order as “qualified.” For ease of reference, we refer to it here as an “order” or “QDRO” even if we are discussing the order at a stage before it is “qualified.”
A QDRO can also be used when one spouse owes child support or alimony to another under the divorce agreement and the source for the repayment funds is a retirement plan, but this article will focus on the more common preparation of a QDRO to split marital retirement assets pursuant to a divorce agreement.
Crucial Steps to QDRO Preparation
Review the Underlying Agreement.
Because a QDRO is merely directing that which the parties have already decided in their separation agreement, a drafter should review the language of that agreement to prepare the order.
In many situations, it can be difficult to translate the division language into an order that will be accepted by a retirement plan simply because the divorce attorneys may not have fully understood what they were dividing and may therefore have used confusing or incorrect wording in the agreement. A QDRO attorney can help you sort out the meaning and hopefully translate it into a workable QDRO.
Better yet, if you are not yet divorced you can read here about how to gather the information about the retirement plans before drafting your separation agreement.
Content of the Order.
A QDRO does two primary things: it tells a retirement plan administrator how to divide the retirement benefits at stake; and it provides basic identifying information about the plan, the parties, and the court’s jurisdiction. Under ERISA, a QDRO must provide the following:
The name and last known mailing address of both the participant and each alternate payee receiving payments under the order;
Each retirement plan to which the order applies;
The amount or percentage of the benefit to be paid by the plan, or the way in which the amount or percentage is to be determined (such as a formula); and
The number of payments to be made or the period of time for which the payments are to be made, for example, a one-time payment or for the life of the alternate payee.
As a first step in preparation, then, a drafter must have the bulleted information to put into the order. The first two bullets provide basic identifying information. The last two bullets tell the plan how to divide the benefit and require an understanding of the type of plan at stake.
Notice that the order does not require Social Security Numbers or birthdates, though most orders include that information since it will ultimately be needed by the plan. Alternatively, that information may be provided to the plan separately.
Although this is not known by most divorce attorneys, ERISA does not require that the QDRO be a stand-alone document: it may be “any judgment, decree, or order (including approval of a property settlement agreement)” so long as it provides the bulleted information above. Thus, if your separation agreement or judgment of divorce provides the required detail, you may file and use a certified copy of that document as your QDRO.
One caveat to using your agreement or judgment: you might need to explain to (or argue with) the retirement plan that such a document qualifies as a QDRO, since the vast majority of QDROs are stand-alone orders and few plans are likely aware that you may fulfill the legal requirements in this way; using an ERISA or QDRO attorney will help in that case.
Directing the Plan How to Divide the Retirement Benefits.
As noted, the order must provide the plan with clear direction on dividing the benefit, describing both the “amount” of the benefit to be paid, which can be a formula or percentage, and the number of payments to be made, which can be expressed as a time period.
Dividing a Defined Contribution Plan
For a 401(k), 403(b) or similar plan, the amount of the benefit is usually a percentage of the account as of a certain date, usually the date the parties consider the end of their marriage, though this is up to them to decide. For example, the parties might be using the date their summons was filed in court as the end date of the marriage, or the date they physically separated, or some other agreed-on date. The QDRO might then direct that 50% of the 401(k) balance that existed on that date is going to the alternate payee.
It is equitable as part of the “amount” of the benefit to also provide that any gains or losses on the alternate payee’s share from that date forward also belong to the alternate payee. Hopefully the underlying agreement provided that the plan calculate this market investment activity as part of the division, and the QDRO can then direct the plan to do this calculation.
With a defined contribution plan, the “number of payments” or “time period” that applies is contained in the order as a “one-time event” because the plan is directed to segregate out the amount owed into a separate account in the alternate payee’s name, and at that point, he or she can roll it into another plan or account, take a distribution, or a combination of both. Thus, in that situation, the number of “payments” equals one.
Dividing a Defined Benefit Plan
A QDRO dividing a defined benefit plan, also known as a “pension plan,” requires something very different than one for a 401(k) or similar plan: pension benefits are calculated by actuaries based on a person’s life expectancy, and paid out as annuities over that life span, usually in a monthly amount that does not change (other than possibly cost of living adjustments).
For pension plans, the amount and number of payments is contained in a formula, usually called a “coverture” formula, or fraction. For the “amount” of the benefit, the order would typically provide the start and end dates of the marriage, and direct the plan to carve out the “marital share” of the benefit, and divide it in half.
The formula typically looks something like this: 50% x (the months of credited service earned during the marriage ÷ the total number of months of service accrued under the plan) = the alternate payee’s share. The resulting “share” figure is multiplied against the participant’s monthly benefit to determine the amount the alternate payee will receive each month.
For the “period of time” the payments would be made under a pension plan, the QDRO typically identifies whether it is the lifespan of the participant or the alternate payee. If it is over the participant’s life, it is called a “shared” payment approach: the alternate payee receives a portion of the monthly payment to the participant.
For a “shared” payment, benefits to the alternate payee would either stop altogether at the participant’s death or continue at a certain percentage to the alternate payee as a “surviving spouse” if the QDRO directed the alternate payee be treated as a surviving spouse. If the alternate payee dies first, his or her share usually reverts to the participant.
Alternatively, the QDRO can state that the alternate payee’s share be calculated independently and based only on the alternate payee’s life expectancy, called a “separate interest” stream of payments. In that case if the participant dies first, the alternate payee’s share continues until his or her death. If the alternate payee dies first, that share simply stops. With a separate interest approach neither party’s share is affected by the other’s death.
Other Elements of a QDRO
The above information is required by statute, but there are other important aspects to a QDRO. For example, most orders also contain language protecting the court’s jurisdiction in case it must reconsider or revise the order, as well as other rights of the participant and alternate payee, such as who is responsible if a payment is made mistakenly to the wrong party. Some of these other provisions will depend on what type of retirement plan is being divided.
A Summary of QDRO Preparation
In preparing a QDRO, you should draft language for the separation agreement that explains the division (or review that language if it is already final). The order should then contain the basic elements required by ERISA, mainly, direction on how to divide the benefit and over what time period the payments should be made, along with information identifying the plan, the participant, and the alternate payee.
Finding Professional QDRO Attorneys
Retirement plans are highly specialized and governed by separate federal laws. There are not many attorneys that focus solely on QDROs. The best divorce attorneys have some knowledge of QDROs but, typically, they are experts in divorce, not retirement plans. An attorney familiar with ERISA would have a good understanding of the legal requirements for retirement plans. That said, they still may not be familiar with the QDRO rules.
If you are not yet divorced, it is best to use a QDRO attorney to review the plans at stake, and draft (or help your divorce attorney draft) the division language for your separation agreement. That way, the correct language will be used, and the alternate payee will not lose aspects of the benefit she or he is entitled to, such as death benefits, survivor benefits, gains on a defined contribution plan balance, or the cash portion of a pension plan, to name just a few.
If you or your attorney need assistance determining the benefits at stake, obtaining plan information, or drafting or qualifying a domestic relations order, call McKain Law at (607) 277-4433 or contact us here to see if we can help.