What is a QDRO?
The Employee Retirement Income Security Act of 1974, 29 USC § 1001 et seq. (ERISA), as amended by the Retirement Equity Act of 1984 (REA), primarily regulates “employee benefit plan” law. ERISA’s “spendthrift” and “anti-alienation” provisions (29 USC §1056(d)) prohibit the division or transfer of interests in an employee participant’s ERISA-governed plan under state community property law except when made pursuant to a qualified domestic relations order (QDRO) issued in a state court family law proceeding. 29 USC §1056(d)(3)).
A QDRO is simply a court order that tells a retirement plan administer how to pay out all or a share of retirement plan benefits to someone other than the employee spouse; this person is generally called the “alternative payee.” If you or your spouse acquired retirement benefits through employment during marriage, federal law may require that a QDRO be prepared to distribute such benefits to an alternative payee.
Who can receive funds pursuant to a QDRO?
Although the non-employee spouse is the most common alternative payee, a former spouse, or a child or other dependent may qualify as an alternative payee too. IRC § 414(p)(8).
For example, if Husband earned retirement benefits during the marriage through his employer, he would be the “employee spouse” or “participant.” On the other hand, Wife would be the “employee spouse” or “alternative payee.” Husband’s employer would not be able to pay benefits to Wife unless a QDRO directed it to do so.
At least one court order has assigned, via a QDRO, ERISA plan benefits to a nonparticipant cohabitant. Owens v. Automotive Machinists Pension Trust(9th Cir. 2009) 551 F3d 1138, 1144-1147. However, in the Owens case, in which the court applied Washington State law, the court defined “marital property rights” within the purview of ERISA by state, not federal, law. Because California does not recognize common law marriage or property rights between unmarried cohabitants, to date, it has not been established whether a cohabitant could be designated as an alternative payee in California.
When is a QDRO needed?
QDROs are necessary when retirement assets are held in certain forms, including most commonly: 401(k), 403(b) and 457 plans, thrift plans, profit-sharing plans, money purchase plans, employee stock ownership plans, tax-sheltered annuities, and business/corporate defined benefit or pension plans. QDROs are generally not needed if your retirement assets are held in certain plans, including Individual Retirement Accounts (IRAs) and deferred annuities.
Can my family law attorney prepare the QDRO?
Some family law attorneys have expertise to draft QDROs. Often, family law attorneys refer this matter out to a QDRO expert who has specialized knowledge to prepare an order that distributes the benefits pursuant to all legal requirements and avoids losses and penalties. In contentious cases, it may be prudent to engage two QDRO experts, one to represent each party. In collegial cases, it is common for the parties to engage one QDRO expert to draft the order.
How does the alternative payee receive the funds?
If the employee spouse has a plan that provides for lump-sum distributions, payment can be made via a lump sum or rolled over into the alternative payee’s IRA or other eligible plan, such as a profit-sharing or 401(k) plan. If the employee spouse has a defined benefit plan or pension, the funds are commonly paid via monthly installments for a defined period.
Alternatively, the spouses may agree for the employee spouse to “buy out” the non-employee spouse’s interest in the benefits.
When should a QDRO be prepared?
The plan administrator has up to 18 months to make a decision about whether a domestic relations order qualifies as a qualified domestic relations order pursuant to ERISA. The deadline starts from the date the payments are due to commence. IRC 414(p)(6), (7) & 29 USC 1056(d)(3)(G), (H).
Therefore, to protect the non-employee spouse’s right to receive benefits, that spouse should obtain and serve on the plan administrator a domestic relations order (or at least a notice of adverse interest) before the benefits are paid to the employee spouse. Note: There is no requirement that a qualified domestic relations order be obtained before the benefits become payable (e.g. when the employee spouse retires or passes away).
Can benefits be paid out to an alternate payee before the payee spouse retires?
Yes—if the plan specifically authorizes that benefits can be paid at a different time (e.g. early retirement or after the after the employee spouse’s employment is terminated). Such payments are called “Gillmore” elections.
Keep in mind that such early retirement benefits are calculated pursuant to their present actuarial value and without the benefit of any subsidy that would have been applied if the employee spouse had in fact retired early. IRC § 414(p)(4) & 29 USC § 1056(d)(3)(i). Payment of these early retirement benefits may start on the earlier of the following: (1) The date on which the employee spouse is entitled to early retirement benefits or (2) age 50 or the earliest date on which the employee spouse could begin receiving benefits if he terminated his employment. IRC § 414(p)(4) & 29 USC § 1056(d)(3).
Can a QDRO be used to collect a collateral debt?
No. A QDRO can be used only to distribute interests in a qualified plan for spousal support, child support, or a marital property division. A QDRO cannot be used to collect a debt that does not relate to the preceding subjects.
Consult Broaden Law LLP for more information on QDROs
In many cases, retirement benefits are one of the most valuable marital assets. Therefore, it is essential to properly distribute these assets. The family law attorneys at Broaden Law LLP can assess whether a QDRO is advisable in your case and engage the services of a QDRO expert to handle your or your spouse’s retirement assets to maximize your interests and minimize fees and penalties.