The 'Q' in QDRO Is for Qualified
By Cindy Fairchild, QKA
Employers and plan administrators have many responsibilities when it comes to operating a qualified retirement plan. One of their more unique duties is to “qualify” domestic relations orders (DROs). This often occurs when a plan participant is subject to a divorce or legal separation that involves the division of marital property, including a qualified retirement plan account. Once qualified, the DRO is referred to as a qualified domestic relations order, more commonly known as a QDRO.
What Makes a Domestic Relations Order a QDRO?
The first step in the qualification process is to understand what a DRO is. A DRO is “a judgment, decree, or order that is made pursuant to state domestic relations law and that relates to the provision of child support, alimony payments, or martial property rights for the benefit of a spouse, former spouse, child, or other dependent of a participant.” A state authority (including a court, state agency, or instrumentality with the authority to issue judgments), must issue the agreement before it can be a DRO under the Employee Retirement Income Security Act of 1974 (ERISA). The DRO can be issued on its own or as part of a divorce decree or property settlement.
Using the DRO definition, the IRS 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.” A DRO can only be a QDRO if it creates or recognizes an alternate payee’s right to receive—or assigns to an alternate payee the right to receive—all or a portion of the retirement plan benefits payable with respect to a plan participant. An “alternate payee” is a spouse, former spouse, child, or other dependent of a participant.
The order must include certain information and meet specific requirements to be qualified.
The following information must be specified in the DRO to qualify as a QDRO under ERISA.
Participant’s and each alternate payee’s name and last known address
Name of each plan to which the order applies
Dollar amount or percentage (or the method of determining the amount or percentage) of the benefits to be paid to the alternate payee(s)
Number of payments or time period to which the order applies
Just as there are rules for what must be in a DRO, there are rules as to what cannot be included in a DRO to be qualified under ERISA, such as a requirement that the plan
provide an alternate payee or participant with any type or form of benefit not provided in the plan;
provide for increased or additional benefits;
pay benefits to an alternate payee that are already assigned to another alternate payee under a previous QDRO; or
pay benefits to the alternate payee in the form of a qualified joint and survivor annuity.
Plan Administrator Sets Procedures to Determine Qualified Status
Under federal law, it is the administrator of the retirement plan providing the benefits affected by an order who is responsible for determining whether a DRO is a QDRO. The administrator, as a plan fiduciary, is required to establish procedures to determine the qualified status of a DRO and to administer the subsequent distributions as detailed in the order. It’s recommended that a plan administrator seek assistance from an attorney or other qualified legal counsel to qualify a DRO.
When a plan participant submits a DRO to the plan administrator, the plan administrator should place a hold on the participant’s account. The hold is meant to prevent distributions from the account until the alternate payee’s benefit from the account is determined and segregated. This is to avoid the liquidation of the benefits while the DRO is being reviewed to determine whether it’s qualified. If, upon review, the DRO does not meet the qualification requirements, the plan administrator should notify the participant and alternate payee(s) that the order does not meet the qualification requirements and detail what is missing from the DRO.
Once a DRO is submitted that meets the qualification requirements, it becomes a QDRO and the account can be segregated based on the order. After this process is complete, the hold can be removed and distributions can be made.
Without a basic understanding of what a QDRO is, or without procedures to follow when presented with a domestic relations order, plan administrators or employers may inadvertently pay out to the wrong person or cause adverse consequences with the participant’s account or the plan itself.
