Special thanks to guest author Jason Luter for this post.
As most family law practitioners are aware, ERISA and the Internal Revenue Code (“IRC”) do not permit a participant in a retirement plan to assign or alienate his/her interest in that plan to another person. These rules are intended to ensure that the participant’s retirement benefits are actually available to provide the participant with financial support during his/her retirement. However, a Qualified Domestic Relations Order (“QDRO”) affords one of the limited exceptions to these anti-alienation rules, and allows a participant’s interest in a retirement plan to be lawfully assigned to an alternate payee, such as a spouse, former spouse, child or other dependent of the participant.
Dividend Pass-Through Elections
As a general rule, a QDRO gives the alternate payee the right to receive all or a portion of the participant’s benefits under an employer-sponsored retirement plan. So, the QDRO can only give an alternate payee rights that the retirement plan actually permits. For example, if a 45 year old participant in a pension plan gets divorced and a QDRO awards 50% of a his/her pension plan benefits to his/her former spouse, but the pension plan does not permit any distributions until age 60, then the former spouse must wait 15 years before receiving any benefits. However, some retirement plans contain special features, like the option for a participant to make a dividend pass-through election, which can be of great value in divorce negotiations. Under certain retirement plans, a participant may elect to personally receive dividends paid by the employer on company stock attributable to the participant’s shares in the company’s stock fund within the retirement plan. If the participant has made such an election, then a QDRO can assign to an alternate payee the right to receive some or all of those dividend payments, unless the plan provisions prohibit it. If the participant has not made such an election, then the parties may wish to discuss having the participant make the election prior to drafting the QDRO.
As an example, consider the situation where an alternate payee (e.g., the wife in a divorce), needs post-divorce income in an amount exceeding what she can earn through employment. Assuming that her spouse owns company stock within his retirement plan, and the plan allows for dividend pass-through elections, then assignment of a portion of the husband’s retirement plan via QDRO can create an opportunity for dividend payments to be received by the wife which may lessen the need to consider contractual alimony or spousal maintenance.
Same-Sex Spouses Are Now Eligible QDRO Alternate Payees
Effective September 16, 2013, a “spouse” includes a person of the same sex if the participant is lawfully married to such individual under state law, based on the state in which the marriage ceremony occurs or occurred – not where the individuals reside. Thus, if a same-sex couple was lawfully married in a state that recognizes same-sex marriage (e.g., Massachusetts), but reside in a state that does not recognize same-sex marriage (e.g., Texas), a QDRO can still name the same-sex spouse or same-sex former spouse as an alternate payee. Note, however, that this only applies to “marriage” – i.e., couples (whether same-sex or opposite-sex) who have entered into a civil union, domestic partnership, or similar relationship recognized under state law do not qualify as “spouses” for QDRO purposes.