QUALIFIED DOMESTIC RELATIONS ORDERS (QDROs): THE BASICS
In most cases, there are retirement plans that must be divided between spouses following divorce. When the retirement plans are employer-sponsored retirement plans, typically a Qualified Domestic Relations Order (QDRO) is required in order to accomplish the division. Some basic components of QDROs include:
1. Participant: The employee that has an interest (i.e., participates) in a given retirement plan. All QDROs will require the Participant’s name, address, date of birth, and social security number. Given that dissolution of marriage matters are public records, most employers now recognize the restrictions of having such information in the Court’s file and, therefore, allow for a separate information sheet, which is not filed with the Court, to be submitted with the QDRO.
2. Alternate Payee: The former spouse that will receive a portion of the Participant’s interest in a given retirement plan. Again, all QDROs will require the Alternate Payee’s name (the maiden or former name should be set forth if it was changed as part of the divorce), address, date of birth, and social security number, which should be set forth on a separate information sheet.
3. Plan Administrator: Approves the QDRO and administers the plan. Further, the administrator fulfills and effectuates the terms of the QDRO. The “qualification” of the QDRO by the administrator is done after the order is entered – following the divorce. Once a QDRO is determined to be qualified by the administrator, then the administrator must effectuate the terms.
4. Certified Copy: Once the QDRO is entered by the Court, a certified copy of the QDRO must be provided to the administrator. If they do not receive it, then they will not be under an obligation to effectuate the terms therein regardless of what is in the Court’s file.
Options for Division of Retirement Plans:
In general, there are two types of qualified retirement plans, defined contribution and defined benefit plans.
Common ways to divide defined contribution plans (e.g. 401(k) and savings plans) include division expressed as a dollar amount or based upon a percentage. In both cases the division should be “as of” a specific date and, to account for market fluctuation, the QDRO should state if the amount divided will include investment earnings or losses.
Sometimes the Participant will have taken a loan against his or her defined contribution plan. The QDRO should state whether any outstanding loan balance will be taken into account in dividing a benefit if the Alternate Payee is to receive a percentage of the Participant’s interest.
Common ways to divide defined benefit plans (e.g. pensions and annuities) include a fixed or formula approach.
A fixed approach provides for the Alternate Payee to receive a portion of the Participant’s accrued benefit (not necessarily fifty percent) as of a specific date (not necessarily the date of the divorce). It is also possible to provide a specific dollar amount, but this should not be done except for in very specific situations.
A formula approach provides for the Alternate Payee receive a percentage of only the portion of the Participant’s total accrued benefit at actual retirement that was accrued during the marriage. To do this, the Participant’s total accrued benefit is multiplied by a fraction, the numerator of which is the number of years of accrued benefits during the parties’ marriage and the denominator is the Participant’s total years of accrued benefits. This method is sometimes referred to as the “fractional” or “coverture” method. By using the formula approach, the Participant’s pre and post-marital property is not shared with the Alternate Payee. At the same time, the Alternate Payee is able to share in increased benefits due to years of service (in some cases higher pension benefits may be realized by the Participant as a result of building upon years of service that were accumulated during the marriage – not necessarily contribution).