QDRO Basics

The Employee Retirement Income Security Act, or ERISA, is a federal law that creates employee rights to retirement accounts. Under ERISA, third party creditors generally cannot access retirement funds. However, a Qualified Domestic Relations Order, or QDRO (pronounced quad row), allows a spouse/ex-spouse or child to become a third party creditor, or alternate payee, to access the employee spouse’s retirement account as part of the property settlement in a divorce or for the payment of child support or spousal support. Non-ERISA plans, including military retirement plans, federal and state retirement plans, church plans, union plans, railroad benefits, and individual retirement accounts (IRAs), do not use QDROs to confer third party creditor rights to spouses.

Defined Benefit vs. Defined Contribution

There are two primary types of employer retirement that allow QDROs to be used to give the alternate payee spouse rights to the employee spouse’s retirement plans--Defined Benefit Plans and Defined Contribution Plans. Both types of plans must follow ERISA in order to be qualified.

Defined Benefit Plans (Pension Plans)

Defined benefit plans define the benefits as a monthly payment the employee will receive after retirement rather than as a lump sum amount. Traditional pension plans are defined benefit plans, although because they are expensive to maintain, many companies are opting for 401(k) plans now.

Defined Contribution Plans (401(k)s and Profit Sharing)

Defined contribution plans define the benefit as a lump sum of money. Typically, 401(k) plans and profit sharing plans are defined contribution plans. Marital rights stop accruing as of date of separation in many states. The lump sum amount is that amount adjusted for any premarital contributions and then adjusted for growth/decline from that date to date of distribution. Most plan administrators will do the calculation for you.

Step 1: Find the Right QDRO Form

The first step is to contact the plan administrator to see if they offer a model QDRO for you to complete. Most large company plans will have model QDRO forms. Some companies have model forms that can be completed online. If your plan does not provide a model QDRO form, you can locate boilerplates online and modify those to your situation. Make sure that the template you use is designed for your particular type of retirement—i.e. defined benefit (ex. traditional pensions) or defined contribution (ex. 401Ks). Read the QDRO and make sure you have filled in any required information and checked any applicable boxes.

Also ask the plan administrator for the summary plan description document. The employer’s HR department may have this, but if not, all plan administrators are required to give this to the employee. Most employees are not even aware that they get them and may be unable to find it.

ERISA has a unique feature that allows for nationwide service of process, which means that the alternate payee spouse can serve a subpoena out of state on the employer if the employee spouse doesn’t provide contact information for the plan administrator, as long as you abide by your own state service rules. Employers are required to accept subpoenas from other states relative to ERISA issues.

Step 2: File the QDRO with the Judge

Before the QDRO can be submitted to the Plan Administrator for final approval, it must be signed by a state court judge. If this is related to a divorce (ex. property settlement, spousal support, child support), then you will file the QDRO with your divorce court judge under that case number. Once the judge signs the QDRO, it has to be submitted to the plan administrator for approval.

Step 3: Submit the QDRO to the Plan Administrator for Final Approval

The QDRO should be submitted to the plan administrator immediately after it is signed by the state court judge. There is no set time by which the plan administrator is required to review and approve or reject the plan. ERISA only requires that it be done within a “reasonable time” and while that isn’t defined under the statute, 18 months has been upheld as reasonable. They main reasons that QDROs are rejected are (1) failing to use the plan’s model QDRO, if it has one, or (2) information was omitted or incorrect in the QDRO. Do not consider the QDRO finalized until you receive a letter from the plan administrator advising you that the order has been approved. Note that some plan administrators charge a fee for processing the QDRO.

With QDRO for a 401(k), the money is either rolled over into IRA held by the alternate payee spouse or rolled over into the 401(k) of the alternate payee spouse if their plans allow contributions of the type. The plan administrators used to just send a check directly to the former spouse with the requirement that they rollover the funds in an IRA or their own 401(k) within 60 days. However, because many alternate payee spouses did not follow through with the rollover, resulting in a considerable tax debt for them, the funds now must be immediately rolled over into the IRA or 401(k).

QDRO Drafting Tips

1. Get the Exact Plan Name

Most people do not know the exact name of their plans although it’s listed on the employee’s annual account statement. A lot of private companies have several retirement plans subject to ERISA and each plan has its own individual name so it is imperative to know the exact plan name. The state court judge and the plan administrator can reject the QDRO if it doesn’t list the right name.

2. Get the Exact Name and Address of Plan Administrator

As is the case with the plan name, the QDRO must also state the exact name of the plan administrator as well as the plan administrator’s address. Keep in mind that many companies use third party administrators to process their QDROs, while other companies have law firms that act as plan administrators. Particularly in smaller companies, it is not unusual for the business owner to also be the plan administrator.

3. Include the Required ERISA Language

To be considered “qualified,” a QDRO must include the required ERISA language listed below. Essentially, there provisions are meant to ensure that the QDRO does not attempt to require the plan administrator to change terms of the plan. If you work for a large company with a model QDRO, the required ERISA language should already be included.

1. Name and last known address of participant and alternate payee spouse;
2. Social Security numbers of both parties (unless your state requires them to be listed on a separate confidential information form);
3. A statement that there will be no greater benefits paid than plan allows;
4. A statement that here will be no other form than the plan allows, etc.; and
5. A statement that no benefits will be paid to one alternate payee that is already to be paid another third party payee.

4. State the Benefits available under the plan

Be clear about what the benefit is and how it is to be paid. Usually, unless the spouses agree otherwise, defined contribution plans are divided by a percentage. In some states, the asset accrues from marriage up to the date of separation. Then, divide the total time on the job x 50%, although in other states, they divide from the date of marriage to the date of divorce. p>

With defined contribution accounts like 401(k)s award an amount by a certain, and the plan administrator is responsible for determining how much that is. The QDRO should contain language stating that the lump sum amount should be adjusted for growth or decline because of fluctuations in stock market and because there is a time lag between when the court decided the share you get and when you actually get them.

Any preretirement termination benefit or a survivor benefit must be specified in the QDRO. A preretirement termination benefit is one that pays out even if the employee quits or dies before reaching retirement age. The QDRO must state whether the benefit changes in the event of preretirement termination.

A survivor benefit, which usually only applies to pensions, is the amount paid to the alternate payee spouse when the employee spouse dies. The employee spouse and the alternate payee spouse get their share of the pension when the employee retires, and when the employee dies, a smaller amount continues to be paid to the surviving alternate payee spouse. This is commonly known as a “widow’s pension.”