The Journal of The DuPage County Bar Association

Back Issues > Vol. 23 (2010-11)

What to Consider Before Drafting a QDRO for a Defined Contribution Plan
by Dorothy A. Voigt

If you practice in the area of divorce, you will eventually need to prepare a Qualified Domestic Relations Order (“QDRO”) to split a retirement plan between the divorcing spouses.  The process of drafting a QDRO for a defined contribution plan is not as intimidating as it may seem to the novice, however. Many of the required provisions are clearly laid out in ERISA, although there are a number of other items that also need to be considered.

A Qualified Domestic Relations Order is an exception to the anti-alienation provisions of the Employee Retirement Income Security Act (“ERISA”) of 1974 that were established by the Retirement Equity Act (“REA”) of 1984.[1]  The anti-alienation provisions were designed to protect a plan participant by not allowing the retirement plan funds to be attached to pay debts.

Fortunately, the language of ERISA regarding QDRO’s does not read like a code that needs to be cracked. Both the definition of a QDRO and the statutory requirements are set out in terms that any legal practitioner should be able to understand.  First, it is important to understand that a QDRO is simply a type of order entered in a divorce proceeding or other domestic relations proceeding. The terms of the QDRO must be recorded in the judgment for dissolution of marriage and/or marital settlement agreement or some other court order.  The definition of a Qualified Domestic Relations Order (“QDRO”) applies to both defined contribution and defined benefit plans.

“The term ‘qualified domestic relations order’ means a domestic relations order which creates or recognizes the existence of an alternate payee’s right to, 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 plan.”[2]

“The term ‘domestic relations order’ means any judgment, decree or order . . . which relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of a participant, and is made pursuant to a State domestic relations law.”[3]

To be valid, the QDRO must specify certain facts, including: (a) the name and last known mailing address of the participant and alternate payee;[4] (b) the amount or percentage of the participant’s benefits to be paid by the plan to each such alternate payee, or the manner in which such amount or percentage is to be determined;[5] (c) the number of payments or period to which such order applies;6 and (d) each plan to which such order applies.[7]

A QDRO meets the requirements above only if it: (a) does not require the plan to provide a type or form of benefit, or any option, not otherwise provided under the plan;[8] (b) does not require the plan to provide increased benefits on the basis of actuarial value;[9] and (c) does not require the plan to pay benefits to an alternate payee which are already required to be paid to another alternate payee under another order previously determined to be a QDRO.[10] In addition to the above factors required by statute, there are a number of other factors that should be considered prior to drafting a QDRO for a defined contribution plan.

Defined Contribution Plans.  A defined contribution plan is a retirement savings plan, under which the employee, employer, or both make contributions into the plan. The principal in the plan is invested and ideally grows over the life of the plan. Upon retirement, the employee can draw from the plan. The plans are popular because tax laws provide incentives for contributions to plans, such as permitting contributions to defined contribution plans to be deducted from an employee’s gross pay prior to calculating payroll taxes. Common types of defined contribution plans are Profit Sharing Plans, Stock Bonus Plans, Money Purchase Pension Plans, Employee Stock Ownership Plans (ESOPs), Target Benefit Plans, and most commonly 401(k) Plans.

One advantage the practitioner has when drafting a QDRO to divide a defined contribution plan is that the account balance and any given time can be readily determined. This makes it much easier to determine the amount that is being divided between the parties. However, the factors noted below can seriously affect the amount received by the Alternate Payee.

Gains and Losses. In a volatile stock market, such as we have experienced in the past few years, it is important to note in the QDRO whether the sum provided to the alternate payee is to be adjusted for market gains or losses. For example, assume a Plan value was $100,000 at the time of the divorce.  It was intended that each party receive half.  The QDRO says $50,000 to the Alternate Payee without noting whether the sum is to be adjusted for market losses or gains.  If the value of the plan increases to $120,000 by the time the plan is to be divided, then half would be $60,000.  However, if the QDRO provides $50,000 only, then the Alternate Payee will receive less than half.  If the value of the plan had decreased to $80,000 at the time the plan is to be divided, then half would be $40,000[11] and the Participant would not be happy if the Alternate Payee were paid the full $50,000.[12]

The parties may agree on a set sum without any market adjustments.  If a set sum is chosen, however, it is possible that by the time the division of the plan benefit is made, that the plan may not have sufficient funds to cover that sum due to market losses.  It is important to consider including market gain and loss language with all defined contribution plans.  Whether market adjustments are to be included should be noted not only in the QDRO, but in the marital settlement agreement (and perhaps at the prove-up as well).

Valuation / Division Date.  The date that a defined contribution plan is to be valued prior to being divided can be important.  In most cases, the idea is to divide the plan benefit as of the date of the divorce (or entry of whatever other relevant order is being entered).  However, it is important to know how the plan works.  If the plan is valued daily, then any date can be used.  But if the plan is only valued once a month or once a quarter, the plan may not be able to value the participant’s interest in the plan on the date of the divorce.

The plan documents must be reviewed for the valuation dates.  If you are not sure if the plan is valued daily or on another basis, the language to include in the QDRO is that the plan should be valued and divided as of the divorce date (or whatever other date is being used) or the nearest valuation date thereto.  Some plans require the valuation date to be the nearest valuation date prior to the divorce.  For example, if the plan was only valued once a month at the end of the month and the divorce occurred on the 20th of the month, then the closest valuation date would be the end of the same month.  If the divorce was on the 10th, then the nearest valuation date would be the end of the prior month.

Loans.  Certain types of defined contribution plans allow the participants to take a loan against their benefits.  It is important to know if the participant has a loan pending with the defined contribution plan as that affects the amount that can be distributed via QDRO.  The statute requires that the amount of a loan that may be taken is the lesser of $50,000 or 50% of the plan value.[13]  In the QDRO it is necessary to indicate whether the Alternate Payee’s portion is to be taken from the balance after the loan is deducted or the balance after adding the loan back to the total. For example, if the plan’s total value is $100,000 and there is a loan for $40,000, if the Alternate Payee receives half after the loan is deducted, they would receive $30,000.  ($100,000 - $40,000 = $60,000 x 50% = $30,000).  If the Alternate Payee received half after the loan was added back to the total, they would receive $50,000.  ($100,000 x .50% = $50,000).  Obviously, if the intent is to give the Alternate Payee half of the total benefit, taking the sum after deducting the loan, does not achieve that result and would provide a substantially smaller sum.
Even if you are sure that there is no plan loan, you will want to include language regarding a loan, because participants can take a plan loan out after the divorce is proved up and prior to the QDRO being entered.

Surviving Spouse Provisions. In a defined contribution plan, the Alternate Payee generally will roll the funds from the plan to his or her own plan or IRA relatively quickly after the QDRO is approved.  In case the Participant dies before the final distribution of the funds to the Alternate Payee, it is important to list the Alternate Payee as the surviving spouse to protect the Alternate Payee’s benefits. After the divorce, the Alternate Payee is no longer the spouse.  If the Participant dies prior to the QDRO being approved and the funds separated for the behalf of the Alternate Payee, it is possible that the Plan will not pay the Alternate Payee.  The Alternate Payee is no longer the surviving spouse and if such right has not been conveyed by the QDRO, then the Alternate Payee may lose their right to benefits.[14]  A QDRO submitted after death may be honored by the Plan, provided that the marital settlement agreement gave the Alternate Payee survivor rights.[15]

The IRC and ERISA provide for the treatment of a former spouse as a surviving spouse for purposes of determining survivor benefits.  To the extent provided in any QDRO: (a) the former spouse of a participant shall be treated as a surviving spouse of such participant for relevant purposes under the IRC and ERISA (and any spouse of the participant shall not be treated as a spouse of the participant for such purposes),[16] and (b) if married for at least one year, the surviving former spouse shall be treated as meeting relevant requirements of the IRC and ERISA.[17]

[1] Retirement Equity Act of 1984, Pub. L. No. 98-397, 98 Stat. 1426 (1984).
[2] ERISA, 29 U.S.C. § 1056(d)(3)(B)(i)(I); I.R.C. § 414(p)(1)(A); see also Kennedy v. Plan Adm’r for DuPont Sav. and Inv. Plan, 555 U.S. 285, 129 S.Ct. 865 (2009).
[3] ERISA, 29 U.S.C. § 1056(d)(3)(B)(i)(II); (ii); I.R.C. § 414(p)(1)(B).
[4] ERISA, 29 U.S.C. § 1056(d)(3)(C)(i); I.R.C. § 414(p)(2)(A).
[5] ERISA, 29 U.S.C. § 1056(d)(3)(C)(ii); I.R.C. § 414(p)(2)(B).
[6] ERISA, 29 U.S.C. § 1056(d)(3)(C)(iii); I.R.C. § 414(p)(2)(C).
[7] ERISA, 29 U.S.C. § 1056(d)(3)(C)(iv); I.R.C. § 414(p)(2)(D).
[8]  ERISA, 29 U.S.C. § 1056(d)(3)(D)(i); I.R.C. § 414(p)(3)(A).
[9] ERISA, 29 U.S.C. § 1056(d)(3)(D)(ii); I.R.C. § 414(p)(3)(B).
[10] ERISA, 29 U.S.C. § 1056(d)(3)(D)(iii); I.R.C. § 414(p)(3)(C).
[11]  See Schuster v. Schuster, 2010 WL 1544278 (E.D. Tenn. 2010); Duncan v. Duncan,  ___ S.W.3d ____, 2010 Ark. App. 561, 2010 WL 3420292 (Ark. App. 2010).
[12] See In re the Matter of Taber – McCarthy, 993 A.2d 240; 160 N.H. 112 (2010); Romer v. Romer, 44 So.3d 514 (Ala. Civ. App. 2009).
[13] I.R.C. § 72(p)(2)(A).
[14] See Robson v. Electrical Contractors Ass’n Local 134 IBEW Joint Pension Trust of Chicago, Pension Plan No. 5, 312 Ill. App. 3d 374, 727 N.E. 2d 692 (1st Dist. 1999); Guzman v. Commonwealth Edison Co., 2000 WL 1898846 (N.D.Ill., Dec.28, 2000).
[15] See Marker v. Northrop Grumman Space & Missions Systems Corp. Salaried Pension Plan, 2006 WL 2873191 (N.D. Ill., Oct. 4, 2006) (unpublished) (concluding that ERISA does not contain a deadline for submitting QDROs).
[16] ERISA, 29 U.S.C. § 1056(d)(3)(F)(i); I.R.C. § 414(p)(5)(A).
[17] ERISA, 29 U.S.C. § 1056(d)(3)(F)(ii); I.R.C. § 414(p)(5)(B).
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