Understanding retirement benefits will lead to a mastery of the QDRO.
By Gale S. Finley (Ohio)
For many years I have had great sympathy for the plight of family law practitioners. Prior to 1985, they had to deal with the frustration of having a significant marital asset locked away in a retirement plan that could not be touched. After 1985, they had to deal with the frustration of dealing with plan representatives who rejected their attempts follow the new law that would allow then to get at that asset. As counsel to retirement plans, I frequently was the one who had to say, “the order that you submitted cannot be accepted as a qualified domestic relations order.” I would try mightily to explain why that was the case. I often failed. The problem is that the drafters of the orders, not being retirement plan experts, struggled to understand the distinction between the different types of retirement plans and the benefits offered by those plans. Therefore, they struggled with trying to divide those benefits.
My experience led me to present seminars for family law practitioners on how to effectively prepare QDROs. The focus of my seminars was retirement plans and how they work. My seminar materials eventually became a book. The focus did not change in that transition. I continue to believe that an understanding of retirement benefits will lead to a mastery of QDROs. This article is a peek into the world of QDROs and how to draft them effectively.
1. What is a QDRO?
“QDRO” stands for Qualified Domestic Relations Order. This concept was created by Congress within the Retirement Equity Act of 1984. The definition of the term is found in section 206(d)(3) of the Employee Retirement Income Security Act of 1974 (referred to in these materials – as well as everywhere else – as “ERISA”) and in section 414(p) of the Internal Revenue Code of 1986 (the “Code”). Obviously, it must be a domestic relations order, which is defined as a judgment, decree, or order issued pursuant to state domestic relations law (including community property law) that provides for child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of a participant in a qualified retirement plan. Note that the definition does not include the modifier “proposed.” Therefore, you should not expect a plan administrator to give you an official ruling on whether a proposed draft of an order qualifies as a QDRO. If it has not been signed by a duly anointed official and filed in accordance with applicable law and procedure, it is not, by definition, a domestic relations order. It follows, then, that the administrator is under no legal obligation to review it. Of course, you should always try to get the administrator to comment on proposed orders in order to avoid having to go back and modify orders that have already been filed with the court. Usually you will get helpful information. Your success may depend on how busy the administrator is and how charming you are.
Keep in mind that a QDRO does not need to be a separate document apart from the divorce decree, although it typically is. All that is required is that it be a domestic relations order that satisfies the requirements of section 414(p) of the Code. This can certainly be accomplished in the decree itself, but I recommend preparing the QDRO as a separate document. One reason is that the plan representatives who will be reviewing the order do not need to know all the intimate details set forth in the decree/separation agreement other than the division of the participant’s interest in the plan. In addition, if the QDRO provisions are included in the decree and the decree is not accepted as having satisfied all of the QDRO requirements, the entire decree would need to be amended and resubmitted. Keeping the retirement plan issues segregated in one document that may end up getting bounced back and forth strikes me as the preferred way to go.
Another point to note is that a QDRO only applies to qualified retirement plans. As a general proposition, that means a pension plan, profit sharing plan, “401(k)” plan, or employee stock ownership plan (ESOP) established by a private employer. Governmental retirement programs are not required to comply with assignments made under a QDRO. Also, a QDRO is not an appropriate assignment vehicle for non-qualified retirement plans (non-funded, deferred compensation plans that are not subject to the same requirements of the Code as are tax-qualified plans). Other retirement plans that are not subject to QDRO benefit assignments are health and welfare plans that provide fringe benefits to employees (such as vacation plans, severance pay plans, life insurance plans, etc.) and individual retirement accounts and annuities and simplified employee pension plans (SEPs). By no means does any of this suggest that benefits under governmental plans and IRAs cannot be assigned. Any assignment, however, will need to comply with other applicable laws.
Being a domestic relations order is not enough. It must be a qualified domestic relations order. This means it must meet all the requirements of section 414(p) of the Code. If it’s not qualified, it won’t work, period.
Continued in Part 2: “Why are these things (and the procedure I have to go through to get them accepted) so difficult?”
Gale S. Finley heads the Corporate Law Department at Sebaly Shillito + Dyer, in Dayton, Ohio. As part of his practice, Mr. Finley represents and counsels numerous retirement plans and plan administrators, including a national multiemployer pension plan, and has reviewed and evaluated QDROs submitted from across the United States. He has written and lectured extensively on retirement plans and the assignment of retirement benefits. He received his B.A. from The Ohio State University and his J.D. from the University of Dayton School of Law. Mr. Finley is a member of the Ohio and Missouri bars, the United States District Court for the Southern District of Ohio, and the United States Court of Appeals for the Sixth Circuit.
This article includes portions of Assigning Retirement Benefits in Divorce, A Practical Guide to Negotiating and Drafting QDROs, Second Edition, authored by Gale S. Finley, © 1999 American Bar Association, reprinted with permission. The balance of the article is © Gale S. Finley.
Reprint with permission.
Prior to 1985, the law precluded assignment or alienation of a participant’s benefit under a qualified retirement plan. That meant that a spouse could not take assignment of retirement benefits as part of a property settlement in a divorce proceeding.
After 1985, the law changed to permit the assignment of retirement benefits in a qualified plan under the terms of a “qualified domestic relations order.” The vehicle was in place but the people who had to drive that vehicle did not have a GPS device (or even a map). So they kept knocking heads with the people who had the power to accept or reject their efforts to draft those orders.