Qualified Domestic Relations Orders: What are they and why do I need one?
Many divorces result in some type of property division. A large number of those property divisions address some type of deferred compensation i.e. a retirement account. Many of those retirement accounts require a Domestic Relations Order which is a special type of court order dividing the retirement account.
A Qualified Domestic Relations Order (typically called a QDRO) is a Domestic Relations Order that has been qualified by the retirement plan as complying with the law under ERISA (the Employee Retirement and Income Security Act of 1974), or some other statutes that may be applicable, as well as the rules of the plan. Many retirement plans write their own administrative procedures to govern the terms of the plan, what can be divided, and how it can be divided. This is the most complicating factor in drafting a QDRO. To further exacerbate the difficulty of drafting a QDRO, there are different types of retirement plans and different methods to divide those retirement plans. Below is some basic information about QDRO’s and retirement plans.
What exactly is a QDRO?
The Internal Revenue Service defines a QDRO as, “…a judgment, decree or order for a retirement plan to pay child support, alimony or marital property rights to a spouse, former spouse, child or other dependent of a participant.” Put simply, a QDRO is an order, signed by a Judge, instructing a retirement plan how to pay money to a party in a dissolution. A QDRO can have many purposes besides simply dividing the retirement account. The QDRO can be a powerful tool to pay an equalizing payment, collect child & spousal support arrears, and can even be written to collect future support payments. Some plans even allow a QDRO to be filed after the death of the participant. However, a QDRO does have limitations.
The person who is seeking to be paid from the retirement account (sometimes called the ‘Non-Participant’, ‘Alternate Payee’, ‘Non-Member Payee’ or ‘Non-Member Spouse’) is limited to certain people. These people include a spouse, former spouse, child or other dependent of the participant because of the “anti-alienation” provision of ERISA, other governing law, or the plan procedures themselves.
How do I know if I need a QDRO?
Many times, a Judgment of Dissolution will require the retirement plan be divided in some manner. Many judgments simply state, “The retirement account is to be divided between the parties pursuant to the time rule” or, “…pursuant to the Brown formula”. Unfortunately, this statement does not address many of the questions that arise in implementing this specific type of Order of the court. For instance, who pays for the cost of the drafting of the QDRO? Who is responsible for joining the plan as a claimant if required? How is the fee charged by the plan to process the QDRO allocated?
Even if a Judgment does not address these questions, many times a division of a retirement plan can be fairly and equitably worked out between the parties by stipulating to the terms of the QDRO.
What are the different types of retirement plans?
Deferred compensation plans can come in many different types including pension benefits, annuities, 401(k), employee stock purchase plans, the list goes on and on. However, a QDRO can only be used to divide benefits in a “Qualified” plan, typically a defined benefit or defined contribution plan.
Defined Benefit Plan
A defined benefits plan is many times called a pension benefit. The plan uses a formula to determine the amount of the benefit, typically something like 3% @ 50. This means that the participant will receive 3% of their pay for each year worked and will be eligible for a normal retirement at 50 years old. These types of plans are typically divided pursuant to the “time rule” discussed below.
Although some employers in the private sector do offer these plans (such as grocery unions or contractor unions), many of these plans are only seen in public sector retirements such as KCERA, LACERA, CalPERS and CalSTRS.
Dividing these types of benefits can be problematic because some of these plans are covered under ERISA and some are covered under the California PERL (Public Employees Retirement Law). Most all retirement plans are covered under the REA (Retirement Equity and Security Act) to some extent.
To add to the frustration of dividing defined benefit plans, the plan retains no cash balance to be divided. This can lead to confusion because many participants are issued an annual statement which shows a “cash value” or “contribution value” amount. It depends on the specific type of plan as to whether or not the value of the plan or contributions can be taken out.
Attorneys and legal document services can create significant problems for their clients because the complex nature of defined benefit retirement plans can cause issues that will not be realized for decades; i.e. at retirement. Some of these issues include failure to provide for survivor benefits, beneficiary designations, qualified pre-retirement survivor annuities, and other benefits which may be available under the plan.
What are Survivor Benefits?
Survivor benefits are an important part of a defined benefit plan because they provide benefits after the plan participant dies. These can be in the form of a QPSA (Qualified Pre-Retirement Survivor Annuity) which provides benefits if the plan participant dies before retirement or a former spouse survivor benefit which provides benefits after retirement where the participant spouse dies before the alternate payee former spouse. If the QDRO fails to address these important benefits, the result can be a loss of a significant amount of money in retirement benefits for the alternate payee.
What is the time rule?
Many Judgments reference the ‘time rule’ or, ‘the time rule as enumerated in Marriage of Brown’. Although many family law attorneys use this exact language, it is a bit of a misnomer. The Brown case never actually mentions the word time anywhere in the decision. The Brown case simply held that retirement benefits can be divided as community property in a dissolution. The actual ‘time rule’ as we know it today originated in a pair of cases; In Re Marriage of Adams and In re Marriage of Judd. The Judd Court gave us the actual language of the ‘time rule’ as we know it today. This language allows the drafter of a QDRO to divide the plan based on the length of the marriage in relation to the time of accrual of benefits.
Because a defined benefit plan payment is calculated using time as a factor, the time rule is ideal to divide this type of plan. The ‘time rule’ is not a formula that can be used to divide a defined contribution plan which is explained below.
Defined Contribution Plan
A defined contribution plan is the one that carries a cash balance and, as such, these plans are sometimes referred to as ‘cash balance plans’. The employee, and sometimes the employer, contributes to the plan. Although there are others, many of us know these as a 401(k), 403(b) or 457(b) plan.
The ‘time rule’ explained above cannot be used to define the community interest in a cash balance plan because time is not a factor used to determine the amount of benefits. This type of plan uses real dollar figures and the gain or loss of the account to determine the amount of benefit.
Although these plans carry a cash balance which can be divided fairly easily in many cases, these plans are no less complex where the QDRO is concerned. If the attorney fails to take into account beneficiary designations, loan calculations, valuation date and how gains or losses are treated to name a few, the result can be a substantial loss of benefits.
Federal Retirement Benefits
Federal retirement benefits can be very complex to divide and are beyond the scope of this article. There are many different types of Federal benefits including Military benefits, tier 1 & tier 2 Railroad benefits (some of which are not divisible in a dissolution), FERS (Federal Employees Retirement System), CSRS (Civil Service Retirement System), TSP (Thrift Savings Plan) and several different hybrid types of plans that incorporate defined benefit and defined contribution components together in a single plan. Some plans even take prior military service into account in calculating the benefit. For that reason, it is important to hire an attorney who knows how to cover these issues in detail during the division of the plan so that issues do not come up later which cannot be undone.
If you need to divide a retirement plan, and you want to make sure it’s done right, call me today to schedule an appointment.