If you practice in the area of domestic relations, then you are familiar with QDROs. As you know a Qualified Domestic Relations Order (QDRO) is a legal order in a domestic relations proceeding that addresses retirement benefits governed by the Employee Retirement Income Security Act (ERISA). A QDRO can create nasty traps for even the most experienced domestic relations attorney.
Trap #1: Not Complying with Plan Document or Summary Plan Description
The QDRO must contain information, such as the name of the plan participant (the person who worked for the benefit) and each alternate payee's name. For a retirement benefit, that is typically a spouse, but there could be others if the plan allows alternate payees such as children. It is important to obtain the plan document or summary plan description to make sure that your QDRO fully complies.
If you cannot find the plan administrator's contact information, try www.freeERISA.com to see if a recent Form 5500 for that the plan has been filed. This form should contain the contact information for the plan administrator.
If the court requires you to draft the QDRO, you will want to make certain that it also contains the last known mailing address of alternate payees, the amount or percentage of the participant's benefits to be paid to each alternate payee, and the number of payments for the time period applicable. The QDRO must note the name of the plan administrator and it should direct that the order be furnished to the plan administrator.
Does the QDRO need to be a separate order?
Technically, the QDRO can be part of a divorce decree or property settlement, but it must still satisfy the plan's requirements. The QDRO should be submitted to the plan administrator after it is signed by the court. Submitting it merely to the employer may not be enough if the employer is not the plan administrator. If the payor of the benefit is different from the plan administrator, also send a copy to the payor.
Trap #2: Not Requesting IN WRITING the Complete Plan Document & Summary Plan Description
Once you have the plan administrator's contact information, then you should request in writing a copy of the complete plan document and the summary plan description (SPD). Make it clear that you are making that request on behalf of a plan participant or beneficiary, or if possible, draft the letter and have your client sign it.
(Let us know if you need a model letter!)
The plan and summary plan description should be provided to you within 30 days of receipt of the requesting letter. If it is not, you may have a claim for a statutory penalty (up to $110 per day for each day that the request is not honored). We recommend sending the letter by fax, email, and certified mail to have some proof of receipt of the letter in case there are problems.
If your client is entitled by law to part of the benefit, your client has rights under the plan. Also, request these additional documents (which are not subject to a penalty claim):
- Benefit statements;
- The plan's model QDRO; and
- Any existing QDROs.
Trap #3: Not Confirming the Plan Provides the Contemplated Benefits
Once you have the plan document, review the benefits available to ensure your client's understanding and intentions are correct. A QDRO may not award an amount or form of benefit that is not available under the plan. That could result in losing the benefit altogether. In other words, if the benefit plan only allows a normal retirement benefit and an early retirement benefit is not available under the plan, then the QDRO cannot change that. It can get tricky however if the QDRO refers only to a certain type of benefit such as an early retirement benefit, and then at the time that the benefit is sought, that benefit is no longer offered by the plan due to an amendment or cut back. (There can be legal changes and reductions in benefits.) Under ERISA generally, only the normal retirement benefit has protection.
Therefore, it is important to add language to the QDRO to recognize those instances and preserve the right to the normal retirement benefit if other benefits are not available at the time.
Trap #4: Who Pays the Taxes?
QDROs do not affect tax reporting requirements. The spouse or former spouse who receives QDRO benefits from a retirement plan must report the amounts received to taxing authorities. However, a QDRO distribution that is paid to a child or other dependent is taxed to the plan participant.
Trap #5: What About Life Insurance or Health Insurance Benefits?
QDROs do not generally apply to life insurance or health insurance benefits. A QDRO only applies to retirement benefits and even then, only when ERISA governs. For example, in a recent case in Alabama, Williams v. Williams, [Ms. 2180981, Sept. 25, 2020], ___ So. 3d ___ (Ala. Civ. App. 2020), a QDRO was entered regarding a spouse's retirement benefits, which were not paid as ordered. However, the retirement benefit was through the Retirement Systems of Alabama which is not governed by ERISA but rather state law. Even though there was a QDRO, the RSA had no obligation to honor it.
As to life insurance, there is a unique issue that arises which will be discussed in another practice pointer newsletter. For now, suffice it to say that if life insurance is part of the property settlement and that life insurance falls under ERISA, it is best to require that the participating spouse and the life insurance plan to re-designate the ex-spouse as a beneficiary after the divorce is final.