Be Prepared for Your Next — or First — QDRO
A domestic relations order entitles an “alternate payee” to a portion of your participant’s retirement benefits. Due to the increase in U.S. divorces each year, your retirement plan is more than likely to receive a domestic relations order. However, it’s up to the plan sponsor or administrator to determine whether the order is qualified and if it complies with your plan’s terms. This will make it a qualified domestic relations order (“QDRO”).
Spotting Common Errors
Below are some of the common reasons a plan sponsor could fail to qualify a domestic relations order:
Inappropriate form of requested payment. Your defined benefit plan might not allow for lump-sum distributions, but the order calls for one.
Distribution timing request. Your plan might allow for a distribution to occur at the participant’s retirement age, but the order might request an immediate distribution.
Valuation timing issues. Your defined contribution plan allows for the valuation of a participant’s vested benefits only on a quarterly basis. However, if the order calls for an immediate valuation of benefits so that a stipulated proportion (for example, 50%) of assets ultimately can be distributed to the alternate payee, the plan sponsor can reject the order.
Fluctuations in asset values. Confusion and disputes can occur if the order doesn’t address an increase or decrease in the value of plan assets between the order’s date and the date of distribution.
Addressing the prospect of premature death of an alternate payee. Your plan document might require that the order specify the implications of the death of an alternate payee before paying the retirement benefit. An order might, for example, stipulate that the benefit be payable to the deceased alternate payee’s estate in order to be qualified.
Poorly drafted domestic relations orders occasionally don’t identify your retirement plan correctly, for example, naming the custodian instead of the plan by its legal name. Some errors are easy to fix, however, a correction(s) will still need to be made before the sponsor could qualify the order.
Dealing with Rejection
There are specific rejection rules when a domestic relations order is incompatible with your plan’s terms. ERISA’s rules are intended to give the alternate payee a reasonable opportunity to correct the errors. A notice of the rejection must be sent to the alternate payee (or payees) and the plan participant.
The notice must explain:
- The sponsor’s (or the administrator’s) reasons for rejecting the domestic relations order,
- Which specific plan provisions are incompatible with the order,
- Any deadlines the plan requires the order to satisfy, and
- Any missing information the order requires to qualify.
ERISA recommends that you use plain language when drafting the domestic relations order so it is easily understood by everyone. It will also be helpful to resolve any domestic relations order qualification issues.
Getting It Right
A rejection is never considered final. When the domestic relations order language is redrafted, it will have to be resubmitted in order to receive qualification from the plan. Be sure to follow your plan document each time a domestic relations order is submitted.
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