A qualified domestic relations order (“QDRO”) is a state domestic relations order that assigns to an alternate payee (such as a former spouse or a child) the right to receive all or a portion of benefits payable to a plan participant. Specifically, under ERISA Section 206(d)(3)(B) and Internal Revenue Code Section 414(p)(1)(B), a QDRO is an order that “relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependents of a participant”.
The order must meet specific requirements as set forth in ERISA and the Internal Revenue Code (specifically, IRC Section 414(p)) before it can be deemed a QDRO and therefore ensure assignment of benefits as provided for in the divorce settlement.
The Plan administrator is responsible for determining whether an order presented to the plan for the assignment of benefits to an alternate payee meets the specific QDRO requirements, as well as complies with the terms of the Plan. The administration of a QDRO can be confusing, time-consuming, and stressful for all parties involved. The Plan administrator is in the best position to understand the plan itself and the distribution of benefits thereunder.
The following are some recommended best practices for Plan administrators in administering QDRO’s.
- Develop and use model QDROs that are tailored to the specific plan or plans.
- A QDRO directed to a defined benefit plan will be different from one directed to a defined contribution plan. The Plan administrator should have a model for each type of plan they administer.
- The model QDRO(s) should be provided to the participant and alternate payee, and/or to their attorneys.
- Develop and use written QDRO plan procedures, which should be distributed to the lawyers and/or participants or former spouses, to assist with the QDRO process.
- Fees may be charged to the Participant for the Plan’s QDRO review and processing, if the Plan is a defined contribution plan, such as a 401(K). The fees should be clearly stated in the Plan’s Summary Plan Description and in the Plan’s written QDRO procedures before the processing.
- Request that the parties provide the Plan with a draft order for review before it is entered by a court.
- A draft order gives the Plan administrator and Plan attorney the opportunity to review and suggest revisions necessary to qualify the order as a QDRO.
- The review of the draft order gives the Plan administrator the opportunity to provide the parties and their attorneys with the Plan’s interpretation of how the benefits will be divided.
- Upon receipt of a domestic relations order for a determination as a QDRO, request that the Plan’s attorney review the order. Depending upon the type of interest to be assigned to the alternate payee, review by the Plan’s actuary should also be done.
- Send written notification to the parties and their attorneys if the purported QDRO that was received by the Plan was determined to be qualified or was not determined to be qualified by the Plan administration. This is called a “determination letter” and is required by law.
- Once an order has been entered by a court and approved by the Plan as a QDRO, the Plan’s interpretation of how the benefits will be divided should be included in the Plan’s written notification to the parties that the order is accepted as a QDRO.
- The interpretation should include how the participant’s benefits will be divided and when the distributions begin to alternate payee. Issuing the interpretation at the time the QDRO is approved helps ward off misunderstandings down the road, particularly for those benefits which will not be distributed immediately.