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Thursday, February 13, 2014

The QDRO - Qualified Domestic Relations Order...or, Divorce and Retirement Funds

This week I helped coordinate the amicable end a cantankerous divorce case -- favorably, I might add. This issue revolved in part around the elderly couples retirement accounts (married for over 26 years - in their late 60's). As I completed the negotiations and concluded the settlement, one remaining task made me think about writing this blog -- the drafting of the QDRO (Qualified Domestic Relations Order). Now, a QDRO is a tricky beast. It involves dividing a qualified retirement plan (that's a 401K, IRA, or really most employer sponsored plan -- which includes non-profits, too!). Interestingly, as a small footnote, military and many federal government retirement plans are not handled via a QDRO, but rather through a separate procedure relative to each federal government plan! Be careful here.

Where is the code defining a QDRO (pronounced "quad-roe") live? That would be 29 U.S. Code § 1056(d)(3)(A) which reads:
Paragraph (1) shall apply to the creation, assignment, or recognition of a right to any benefit payable with respect to a participant pursuant to a domestic relations order [ed: paragraph one prohibits alienation or assignment of plan benefits], except that paragraph (1) shall not apply if the order is determined to be a qualified domestic relations order. Each pension plan shall provide for the payment of benefits in accordance with the applicable requirements of any qualified domestic relations order.

What qualifies as a QDRO? That's a tricky question, and you want to be sure to speak to an attorney. However, the minimum requirements of a QDRO are discussed at 29 U.S. Code § 1056(d)(3)(B), (d)(3)(C), (d)(3)(D). Essentially, they are:
[A plan] which creates or recognizes the existence of an alternate payee’s right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under a plan, and

  • (i)the name and the last known mailing address (if any) of the participant and the name and mailing address of each alternate payee covered by the order,
  • (ii)the amount or percentage of the participant’s benefits to be paid by the plan to each such alternate payee, or the manner in which such amount or percentage is to be determined,
  • (iii)the number of payments or period to which such order applies, and
  • (iv)each plan to which such order applies and

  • (i)does not require a plan to provide any type or form of benefit, or any option, not otherwise provided under the plan,
  • (ii)does not require the plan to provide increased benefits (determined on the basis of actuarial value), and
  • (iii)does not require the payment of benefits to an alternate payee which are required to be paid to another alternate payee under another order previously determined to be a qualified domestic relations order.

Now a QDRO generally comes in two flavors: shared payment and split interest. The code that discusses these provisions can be found at 29 U.S. Code § 1056(d)(3)(C)(ii) [requires the plan to specify how the benefits should be paid -- see above]. If you don't like ERISA code (that's 29 U.S. Code), you can saunter over to the Internal Revenue Code for the exact same wording -- see 26 U.S. Code §414(p)(2)(B). Exciting.

SHARED PAYMENT: Under this approach, the alternate payee (that's the spouse who is getting part of the benefit in the divorce settlement) does not segregate a lump sum from the participant (that's the person that owns the plan now). Instead, when the participant retires, part of the payment he/she receives each period (usually once per month) is paid to the alternate payee.

SPLIT INTEREST: Under this approach, at the time the QDRO is implement by the plan administrator, a portion is split off from the participant and assigned to the alternate payee. This amount may then be maintained in the plan, distributed to another retirement account, or paid in a lump sum (often with penalties) to the alternate payee.

There is a considerable amount of calculation and planning that must go into advising a client on how best to handle retirement benefits. This includes such things as gain/loss provision for split interest (determining when the actual split occurs such that changes in the value of the plan total are reflected (gain or loss) in the alternate payees distribution -- or not), the duration of the payments under the plan, the taxable implications of rollovers, etc.

QDRO's can be tricky, but can be managed well if planned in advance of the actual divorce trial or settlement. Do not be pressured into agreeing to any term within the QDRO, and be sure to read the QDRO carefully. The differences as to how much is paid, who shares the gain/loss risk, and when payments are made is critical. Further, and most importantly, make sure that a QDRO is the right tool for dividing the retirement amount.

Do you need help drafting or reviewing a QDRO? Contact us! We can help. We operate in Virginia, Maryland, and DC -- and we have many years of family law experience.

Sean R. Hanover, Esq.
Principal Attorney
The Hanover Law Firm is located in Washington, DC and Fairfax, VA. We practice
in both state and federal courts in VA, MD, and DC.

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