QDRO Top Ten List
1. Know the real name of the plan.
Does your client know what kind of retirement plan he or she participates in? It might surprise you to know that many people use the words “retirement” and “pension” interchangeably. Today however, more people have 401k plans as the basis of their retirement than traditional pensions. Even if they know what kind of retirement plan they have, most people don’t know its real name. What one party calls “my 401k” might actually be called “The X Company Savings Plan,” and “her pension” might be “The Y Company Retirement Security Plan.” Knowing the real name of the plan is important–an otherwise perfectly acceptable QDRO will be rejected by the plan administrator if the plan name is not correct. (Be careful about Employees vs. Employees’ too!)
2. If you intend to transfer a flat sum to the Alternate Payee, say so.
In most straight equitable divisions, including investment experience is the norm. If the retirement division includes an offset for value from another asset, there isn’t really a norm. Either way, however, the agreement or judgment should be explicit about the intent to include investment experience or to transfer a flat sum. Plan administrators require QDROs dividing defined contribution accounts such as 401ks to state whether the Alternate Payee’s share will be subject to investment gains and losses from the date of divorce (or separation, or whatever date the parties choose) until the funds are segregated for his or her benefit. It’s also important for the parties to be clear on this issue, because ambiguity often leads to additional post-judgment expense and court involvement.
3. Know what you can and can’t do with the survivor benefit.
Will the Alternate Payee be entitled to a survivor annuity based on the Participant’s pension when the Participant dies? This seems like an easy question, but it’s not because it brings up so many other questions. If the former spouse gets the survivor annuity, does that preclude a subsequent spouse from having one? What happens if the former spouse remarries? Can the benefit be divided proportionally between a former and current spouse? Who will bear the cost of the survivor annuity? Is it possible to shift the cost, or will the plan only allocate it equally between the parties? Plan regulations and procedures differ with regard to survivor benefits. Before the parties decide or you ask the court for relief, investigate what options the plan allows.
4. The survivor benefit is a separate entity.
A corollary to #3—just because the Alternate Payee will receive a portion of the Participant’s pension does NOT mean he or she will automatically receive a survivor annuity when the Participant dies. The survivor annuity is a completely separate benefit, and should be negotiated and plead separately.
5. Consider a Separate Interest QDRO.
The Alternate Payee is often entitled to pension benefits “if, as, and when” the Participant receives them. This is known as a shared payment division. Another option may be for the Alternate Payee to receive a separate interest in the plan by dividing (conceptually) the entirety of the funds expected to be paid to the Participant, and then amortizing the Alternate Payee’s share over the life of the Alternate Payee. Not all pension plans accept these kinds of QDROs (for example, the Federal government does not), but this may be a good option for the Alternate Payee if it is possible, especially if there is resistance to the provision of a survivor annuity.
6. Governmental entities do not follow ERISA.
“Qualified Domestic Relations Order” is an ERISA-specific term. If the plan is not an ERISA plan—governmental and church sponsored plans (and a few other esoteric plans) are not—do not title your document “Qualified Domestic Relations Order.” Some governmental plan administrators don’t care, but most will reject your order if it smacks of ERISA. Instead, use “Eligible” or “Acceptable” in your title.
7. Thou shalt not offset 401ks against pensions.
It is surprising how many times the parties to an agreement believe they will be able to redistribute their retirement funds using just one QDRO. Some agreements actually say “The parties will equalize the values of their pensions and 401k plans, and the Alternate Payee shall be responsible for the preparation of a QDRO to effectuate the equalization.” Worse than the comparison between apples and oranges, this is more like trying to equalize the values of shoes and spoons. It just doesn’t work.
8. IRA transfers don’t need QDROs….or do they?
Technically, no, IRAs are not “qualified plans” in the true sense of the ERISA term “Qualified.” Most are divisible using the plan’s own forms and maybe a set of formal Letters of Instruction directing the transfer from the Participant’s account and acceptance into the Alternate Payee’s account. Some plans also require a QDRO-like document, however, to confirm that the transfer is incident to divorce, and to clarify the tax issues, if any should arise with the Alternate Payee’s withdrawal of pre-tax funds. It is wise to check with the specific plan or fund custodian about whether this kind of document should be included in the transfer packet.
9. Military Pensions are tricky.
Be alert when the division of a military pension is on the horizon. What is divisible is the service member’s military retired pay. Service members may later waive portions of their normal pension in favor of a disability or VA pension. Pension funds paid under these waivers are not military retired pay, and are usually not available for the Alternate Payee to claim except in certain specific circumstances.
10. QDROs are also useful for…
Collecting child support arrearages. Although retirement assets are most often thought of as marital property, defined contribution plans such as 401ks can also be thought of as resources for the collection of child support. Indeed, ERISA/REA notes that a QDRO can address “child support, alimony payment or marital property rights” with regard to “a spouse, former spouse, child or other dependent” of the Participant. It would seem that funding one’s future while restricting one’s child’s present is frowned upon!
Laura N. Venezia, Esq.
Law Office of Laura N. Venezia, Esq.
One West Church Street
Frederick, MD 21701