Dividing Retirement Benefits in Divorce
The benefits accumulated under
qualified pension and profit sharing plans are often one of the largest
assets a married couple owns. If the couple divorces, sometimes their
retirement benefits must be divided. Since 1984, federal pension law has
provided special procedures enabling family courts to divide pensions in a
divorce or separation.
Although the rules governing the division of retirement plan benefits in
a divorce are straightforward, strict compliance with applicable legal
requirements is necessary to avoid possible plan disqualification or the
taxation of benefits to the participant rather than the one receiving the
Pension law authorizes qualified retirement plans to comply with state
court domestic relations orders dividing pension benefits, whether by
separate court order or a court-approved property settlement agreement.
However, the order must satisfy certain requirements in order to be
considered a "qualified" domestic relations order (QDRO).
Generally, a domestic relations order is used to provide child support or
alimony payments, or to divide marital property as part of a divorce. The
QDRO creates or recognizes a right of an alternate payee to receive all or a
portion of the benefits payable to a plan participant. The alternate payee
is usually the spouse or former spouse but can also be a child or other
dependent of the participant.
Plans are required to have written reasonable procedures for determining
whether domestic relations orders are QDROs and for administering
distributions. The procedures should be designed to ensure that QDRO
determinations are made in a timely, efficient and cost-effective manner,
consistent with the administrator’s fiduciary duties under ERISA.
The plan administrator is responsible for determining whether an order is
a QDRO. However, it is not the plan administrator’s task to evaluate the
fairness of the QDRO but only to determine that the order meets the legal
requirements to be a valid QDRO.
To be a valid QDRO, the order must be sent to the plan administrator and
clearly specify the following required information:
- The name and last known mailing address of both the participant and
each alternate payee covered by the order;
- The amount or percentage of the participant’s benefits to be paid to
the alternate payee (or the manner in which the amount or percentage is to
- The number of payments or period to which the order applies; and
- The name of each plan to which the order relates.
A domestic relations order is not a QDRO if:
- It requires the plan to provide an alternate payee with any type or
form of benefit not otherwise provided by the plan;
- It requires the plan to provide for increased benefits; or
- It requires the plan to pay benefits that are already required to be
paid to another alternate payee under a prior QDRO.
In most cases, the employer is the plan administrator. The employer may
be the plan administrator as a corporate entity, if it is a corporation, or
as a partnership, if that is its business structure. Or, the plan
administrator may be a named individual or a committee appointed by the
The plan administrator is required to promptly notify both the
participant and alternate payee of receipt of the order and to provide to
them a copy of the plan’s written procedures for determining whether the
order is a QDRO.
During the review process, the plan administrator must separately account
for the amounts that would be payable to an alternate payee, and be careful
that benefits are not wrongly paid out to the participant, i.e., participant
loans, hardship withdrawals, or withdrawal of employee contributions.
It is the plan administrator’s responsibility to declare that a domestic
relations order is a QDRO within a reasonable period of time after receipt
of the order. The plan administrator must notify the participant and
alternate payee as to whether the order is a QDRO. If it is determined that
the order is not a QDRO, the plan administrator must provide the following
information to the participant and alternate payee:
- The reasons why the order is not a QDRO;
- References to the plan provisions on which the determination is based;
- An explanation of any time limits that apply; and
- A description of any additional information or modifications necessary
for the order to be a QDRO and an explanation as to why it is necessary.
As a practical matter, the plan administrator will ordinarily contact its
pension and/or legal advisors for confirmation that the court order is a
valid QDRO and for assistance in complying with both the procedural notice
requirements and implementation of the QDRO.
The plan administrator must provide prospective alternate payees who are
involved in a domestic relations order proceeding access to plan and
participant benefit information sufficient to prepare a QDRO, such as the
summary plan description, a copy of the plan document and a statement of the
participant’s benefit entitlement.
The plan administrator may condition disclosure of such information to a
prospective alternate payee on some reasonable basis for concluding that the
request for information is being made in connection with a domestic
In general, pension law does not require payments to begin to an
alternate payee until the "earliest retirement age" of the participant,
defined as the earlier of two dates:
- The date the participant is entitled to a withdrawal under the plan,
- The later of either:
- The date the participant reaches age 50, or
- The earliest date on which the participant could begin receiving
benefits under the plan if the participant separated from service.
Such payments are permitted even though the participant is still employed
at the time and intends to remain employed in the future.
Plan documents or written QDRO procedures may permit earlier distribution
of benefits to the alternate payee. Many plans avail themselves of the
opportunity to provide immediate cash-out of alternate payee benefits in
order to avoid the need for segregated accounts, extended division of
present and future benefits and other administrative headaches.
The method used for dividing the retirement benefits payable to an
alternate payee will depend upon whether the plan is a defined benefit plan
or a defined contribution plan.
Generally, a defined benefit plan provides a specific benefit determined
and payable at retirement. The benefit is usually determined based upon
factors such as years of service and compensation of the participant, and is
payable in the form of a monthly benefit.
Because of the nature of the benefits provided by defined benefit plans,
division of such benefits in divorce proceedings may raise complex issues.
Benefits may have not yet fully vested in the participant, and there may be
substantial future accruals which may or may not be taken into account under
the QDRO. Valuation of defined benefit amounts may be based on a variety of
Many defined benefit plans do not allow lump sum payouts to alternate
payees. Therefore, the alternate payee must accept an annuity form of
benefit, which may not be payable until the participant is entitled to
Instead of promising a future benefit like defined benefit plans, defined
contribution plans provide an individual account for each participant. The
account grows through employer and/or employee contributions, earnings and,
in some cases, forfeitures from the nonvested portion of the accounts of
terminated participants that are reallocated to the remaining participants.
For defined contribution plans, the alternate payee generally receives a
percentage of the participant’s vested account balance (such as 50%) as of a
particular date, although a dollar amount may be specified. If the parties
agree as to the division fraction and if immediate distribution is permitted
and selected, the only remaining issue may be how currently to value the
alternate payee’s interest since many defined contribution plans are not
valued on a daily basis.
Payments to a participant’s spouse or former spouse are taxable to the
spouse. The spouse or former spouse of the participant may elect to have all
or a portion of a lump sum payment pursuant to the QDRO directly rolled over
to an IRA or another qualified retirement plan, thereby deferring the tax.
Any portion not rolled over is generally subject to federal income tax as
well as any applicable state income tax but not the 10% early withdrawal
Distributions to other alternate payees, such as the child of the
participant, are taxed as income to the participant, may not be rolled over
and are not subject to the 10% early withdrawal penalty.
Earlier this year, the DOL issued Advisory Opinion 2004-02A regarding
modifications made by a court to an existing QDRO. This guidance states that
a new domestic relations order covering the same parties can alter a prior
one so long as the new order meets the qualification requirements for a
QDRO. Generally, the changes would only apply to future payments.
In May 2003, the Department of Labor (DOL) issued Field Assistance
Bulletin (FAB) 2003-3, which completely reversed its prior position
regarding charging an individual participant’s account for the fees related
to a determination of the validity of the participant’s QDRO. Prior to FAB
2003-3, plans were permitted to pass on QDRO determination expenses to the
plan as a whole but not directly to the account of the participant involved
in the QDRO. Plans are now permitted to allocate reasonable expenses
associated with QDRO determinations directly to the participant’s account.
In order to take advantage of the DOL’s new position, the plan’s document
may need to be amended to include specific provisions for the allocation of
expenses. In addition, plans must include information in the summary plan
description concerning any expenses that could be charged against a
QDROs require special language and should be carefully reviewed to make
sure they meet the requirements of the law and are administrable under the
terms of the plan. The protection afforded by the federal government to a
divorcing spouse adds one more administrative chore for the plan
administrator. But with proper consulting and legal advice, the plan can
handle QDROs without a great deal of strain.
The information contained in this newsletter is
intended to provide general information on matters of interest in the area
of qualified retirement plans and is provided with the understanding that
our company is not engaged in rendering legal or tax advice. Legal or tax
questions should always be referred to a qualified tax advisor such as an
attorney or CPA.