A qualified domestic relations order (QDRO) is (i) a domestic relations order (ii) that creates or recognizes the existence of an “alternate payee’s” right to receive, or assigns to an alternate payee the right to receive, all or a portion of the benefits payable with respect to a participant under a retirement plan, and (iii) that includes certain information and meets certain other requirements as provided by law. ERISA § 206(d)(3)(B)(i); IRC § 414(p)(1)(A).
So, what does that mean? In more plain language, a QDRO allows persons incident to a divorce, legal separation, or dissolution of same sex partnerships, the right to divide their retirement benefits with their former spouse. This is particularly important if only one spouse to the marriage was saving for retirement and said savings are held in a qualified retirement Plan.
QDROs are governed by the Employee Retirement Income Security Act of 1974 (ERISA), the Internal Revenue Code of 1986 (the IRC), and the Plan holding the retirement funds. Unless incident to division in a divorce or similar domestic proceeding, ERISA and the IRC do not allow a retirement Plan participant (i.e., the spouse saving for retirement by placing funds in a 401(k) Plan) to assign their interest in a retirement plan to another person. A exception to the anti-assignment rule occurs by way of a Qualified Domestic Relations Order.
Through entry of a QDRO, retirement interests may be assigned to the alternate payee (the ex-spouse) but only if the order assigning the right constitutes a “qualified domestic relations order.” For this reason, it is extremely important that the lawyer or entity drafting the QDRO has the qualifications to draft the QDRO to affect its qualified state.
QDROs have many pitfalls beyond being “qualified.” For example, a QDRO is supposed to list personal information about both the person saving for retirement (the plan participant) and the alternate payee, including their full Social Security Numbers (SSNs). In today’s world, placing this kind of personal identification information in a court order can place persons at risk of identity fraud. The proper drafting can ensure that while the Plan receives this necessary information, the QDRO filed with the court does not include it, while still ensuring the Order is “qualified.”
QDROs are also time sensitive. They should be entered directly subsequent to or at the same time as a Judgment for Dissolution of Marriage. This will ensure that the alternate payee receives their share of benefits even if the Plan participant dies before he or she can enjoy the benefits. If the qualified Plan is a pension, additional documentation may be necessary at the time goes into Pay Status to ensure proper distribution of benefits. Finally, QDROs must be certified to be accepted by most Plans and certification must occur in most jurisdictions on the date of entry of the QDRO. Failing this step may cause the QDRO to be rejected the Plan, even if otherwise properly drafted.
If you require a QDRO or other Order directed a retirement plan to release funds to an alternate payee many years after your Judgment was entered, there may still be hope. Some Plans will accept the QDRO at any time prior to the Plan going into Pay Status. Other Plans will accept QDROs while in Pay Status. Alternatively, a new order can be entered directing the person receiving the benefits (the ex-spouse, for example) to pay the alternate payee directly and/or from their estate even after death. These situations are much more difficult and can be avoided if done correctly at the time the final decree is entered.
If you have any questions about whether a Plan requires a QDRO, or QILDRO (“Qualified Illinois Domestic Relations Order”), please do not hesitate to contact one of the attorneys at Weiss Kunz & Green, LLC to answer your concerns. – Maxine Weiss Kunz, Esq.