Health & Retirement Benefits on

Pensions & Divorce

The following is an adaptation of portions of a booklet prepared by the Pension and Welfare Benefits Administration (PWBA) of the U.S. Department of Labor, in consultation with the Department of the Treasury and the Internal Revenue Service.

Whether and how to divide a pension are often important considerations in separation, divorce, and other domestic relations proceedings.

The division of marital property generally is governed by state domestic relations law. Pensions, however, are governed by two federal statutes, namely the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (the Code). Any division of pension interests must comply with these laws, in addition to state law.

Under ERISA and the Code, any court order that tries to divide pension interests must be a "qualified domestic relations order," or "QDRO." The following discussion explains how the law determines whether a court order is a QDRO, and what this could mean for you.

This booklet is written in the form of a brief overview, which is followed by a series of questions and answers. If you do not find the information you need through this format, you will find contact numbers and a Web link at the end of the discussion that you may use to obtain more information.

Qualified Domestic Relations Orders: An Overview

In general, ERISA and the Code do not permit an employee to assign his or her interest in a pension plan to anyone else. These "anti-assignment and alienation" rules are intended to ensure that the employee’s pension benefits are actually available to provide financial support during his or her retirement years.

The QDRO rules are a limited exception to the anti-assignment and alienation rules. Because of this exception, pensions can be divided between spouses or other allowed persons, despite ERISA, if a state court makes such an order in a form that qualifies as a QDRO.

In addition, ERISA requires a pension plan administrator to obey the order if it is a QDRO. Thus, the question of whether the order qualifies as a QDRO is very important. There are certain requirements, however, which must be met in order to qualify the order as a QDRO.

1. Is it a "domestic relations order?"

In order to be a QDRO, the document must be a judgment, decree, or order (including the approval of a property settlement) that is made pursuant to state domestic relations law (including community property laws in the eleven states that have such laws). In addition, the document must relate to the provision of child support, alimony payments, or marital property rights for the benefit of a spouse, former spouse, child, or other dependent of a participant.

Agreements between the parties do not satisfy the requirement for an "order." The mere fact that a property settlement is agreed to and signed by the parties will not, in and of itself, cause the agreement to be a domestic relations order. A state authority, generally a court, must actually issue a judgment, order, or decree formally approving the settlement before it can be considered a domestic relations order under ERISA.

Interestingly, if a court or other state authority issues an order approving an agreement, it is not necessary that the parties themselves sign or endorse it at all. It is also not necessary that the pension plan be brought into state court, or that the administrator be made a party to the divorce proceeding, for an order issued in that proceeding to qualify as a domestic relations order.

2. Can an agency other than a Court issue a "domestic relations order?"

Yes. A domestic relations order may be issued by any state agency or instrumentality with the authority to issue judgments, decrees, or orders, including the power to approve property settlement agreements, under state law.

3. How does a domestic relations order become "Qualified?"

If the order is a domestic relations order, it becomes qualified if it assigns some of the pension benefits to an "alternate payee" (explained below), and if it includes certain information and meets certain other requirements.

An "alternate payee" is a spouse, former spouse, child, or other dependent of the plan participant. No one else can be the alternate. Alternate payees are limited to those situations and relationships in which domestic law governs.

In addition to naming only one of the above persons as alternate payee, a QDRO must contain the following information:

1. The name and last known mailing address of the participant and each alternate payee;
   
2. The name of each plan to which the order applies;
   
3. The dollar amount or percentage (or the method of determining the amount or percentage) of the benefit to be paid to the alternate payee; and
   
4. The number of payments or time period to which the order applies.

Along with the above requirements, there are certain provisions that a QDRO must not contain:

1. The order must not require a plan to provide the alternate payee with any benefit not otherwise provided under the plan;
   
2. The order must not require a plan to provide for increased benefits (determined on the basis of actuarial value);
   
3. The order must not require a plan to pay benefits to an alternate payee that are required to be paid to another alternate payee under a previous QDRO; and
   
4. The order must not require a plan to pay benefits to an alternate payee in the form of a qualified joint and survivor annuity for the lives of the alternate payee and his or her subsequent spouse.

4. Does a QDRO have to be part of a divorce proceeding?

No. Any domestic relations order that provides for child support or recognizes marital property rights may be a QDRO, without regard to the existence of a divorce proceeding. Such an order, however, must be issued pursuant to state domestic relations law, and it must meet the other requirements for a QDRO, despite not being part of a divorce proceeding. create or recognize the rights of an individual who is an "alternate payee."

Probate court orders are not QDRO’s unless they relate to the dissolution of a marriage or recognition of support obligations. An order that awards benefits solely under state community property law is not a QDRO, because the proceeding does not relate to a legal separation, marital dissolution, or family support obligation.

5. Who determines whether an order is a QDRO?

Under Federal law, the administrator of the pension plan initially determines whether a domestic relations order is a QDRO.

Plan administrators have specific responsibilities and duties with respect to this determination. Administrators are required to discharge their duties prudently and solely in the interest of plan participants and beneficiaries. Among other things, plans must establish reasonable procedures to determine the qualified status of domestic relations orders and to administer distributions pursuant to qualified orders.

Administrators are required to follow the plan's procedures for making QDRO determinations. Administrators also are required to furnish notice to participants and alternate payees of the receipt of a domestic relations order and to furnish a copy of the plan's procedures for determining the qualified status of such orders.

A state court does not have jurisdiction to determine whether an issued domestic relations order is a QDRO. Jurisdiction to challenge a plan administrator's decision about the qualified status of an order lies exclusively in Federal court.

6. Who is the "administrator" of the plan?

The "administrator" of an employee benefit plan is the individual or entity specifically designated in the plan documents as the administrator.

The name, address, and phone number of the plan administrator is required to be included in the plan's summary plan description. The summary plan description is a document that the administrator is required to furnish to each participant and to each beneficiary receiving benefits. It summarizes the rights and benefits of participants and beneficiaries and the obligations of the plan.

If the plan documents do not designate an administrator, the administrator is the employer maintaining the plan, or, in the case of a plan maintained by more than one employer, the association, committee, joint board of trustees, or similar group representing the parties maintaining the plan.

7. What are the plan administrator’s duties regarding QDRO’s?

ERISA imposes a number of responsibilities on the plan administrator relating to the handling of domestic relations orders. The administrator is required to discharge these responsibilities prudently and solely in the interest of the plan's participants and beneficiaries.

a. Duty to provide plan documents.

Under Federal law, alternate payees — spouses, former spouses, children, and other dependents of an employee — are entitled to have enough information about the plan and benefits to prepare a QDRO. Such information might include the summary plan description, relevant plan documents, and a statement of the participant's benefit entitlements.

A prospective alternate payee does not have to submit an actual domestic relations order in order to have a right to the above information. A plan administrator is entitled, however, to have information about the prospective alternate payee to reasonably establish that the request for information is being made in connection with a domestic relations proceeding.

b. Duty to give notice.

Upon receipt of a domestic relations order, the plan administrator is required to promptly notify the employee and each alternate payee named in the order. The notice must inform those persons that an order has been received, and it must provide a copy of the plan's procedures for determining whether the order is a QDRO. These notices should be sent to the addresses stated in the domestic relations order.

c. Duty to act.

The administrator is required to determine whether the order is a QDRO within a reasonable period of time after receiving it. He or she also must promptly notify the employee and each alternate payee of that determination.

The amount of time that is "reasonable" depends upon the circumstances. If the QDRO is written on the basis of model language provided by the plan (explained below), a faster decision would be reasonable. There are, however, no absolute time limits.

If the plan adminstrator determines that the order is a QDRO, he or she must honor it by dividing pension payments among all of the parties entitled to share in it under the QDRO.

8. How does the plan administrator determine whether the order is a QDRO?

In general, the plan administrator’s QDRO procedures must be reasonable. They must be in writing, and they must permit an alternate payee to designate a representative to receive information from the plan about the order if he or she is unable to respond personally.

"Reasonable" means that the procedures must not unduly inhibit or hamper the plan from making QDRO determinations or distributions under a QDRO. In addition, reasonable procedures should include clear explanations of the plan's determination process, including:

1. An explanation of the information available to interested persons,, such as summary plan descriptions, plan documents, individual benefit and account statements and any model QDROs developed for use by the plan;
   
2. A description of any time limits set by the plan administrator for making determinations;
   
3. A description of the steps the administrator will take to protect and preserve pension assets or benefits upon receipt of a domestic relations order. (For example, this might consist of a description of when and under what circumstances plan assets will be segregated or benefit payments will be delayed or suspended); and
   
4. A description of the process provided under the plan for appealing the administrator's QDRO determination.

Although they are not required to do so, plan administrators may develop and "model" QDRO forms to assist parties to prepare a QDRO. Such model forms may make it easier for the parties to prepare a QDRO, and may also reduce the cost of the plan administrator's QDRO determination.

The plan administrator may not, however, require any party to use any particular form or model form developed by the plan. As long an order meets the QDRO requirements, it must be honored, regardless of whose language it is.

The plan administrator may not reject an order that would satisfy the QDRO requirements, except for missing information within the plan administrator's knowledge or easily obtained through a simple communication with the alternate payee or the employee. For example, an order may misstate the plan's name, or it may leave out or misspell the name of the employee or the names of alternate payees. If the plan administrator can clearly determine the correct names by looking in its own records or contacting one of the parties, the plan administrator should supplement the order with the appropriate identifying information, rather than rejecting the order as not qualified.

11. What happen if the plan administrator determines that the order is not a QDRO?

The plan administrator must notify the parties of the determination promptly and in writing. Notice should be written in a manner that can be understood by the parties. It should include the following information:

1. The reasons that the order is not a QDRO;
   
2. References to the plan provisions on which the determination is based;
   
3. An explanation of any rights of appeal available to the parties or protective actions that the administrator will take;
   
4. Any time limits that apply to the above rights available to the parties under the plan; and
   
5. A description of any additional material, information, or modifications necessary for the order to be a QDRO, and an explanation of why such material, information, or modifications are necessary.

In most instances, the parties will attempt to correct any deficiencies in the order and resubmit a corrected order for the plan administrator to review. A prudent plan administrator at that point will offer information, advice, and guidance to assist the parties to submit a properly-drafted order, so as to avoid the cost and inconvenience of multiple submissions.

11. Can the plan charge a fee for making a QDRO determination?

No.

12. What happens to pension payments after an order has been issued, but before the plan administrator has determined whether it is a QDRO?

If QDRO status has not been determined, or a determination is in dispute, the plan must set aside money for the alternate payee(s) while the determination is made or the dispute is resolved. These amounts are called "segregated amounts." Segregated amounts must be accounted for separately from other pension payments. They kept in this manner for up to 18 months, beginning on the date they would be due under the domestic relations order at issue.

13. Will the Department of Labor issue advisory opinions on whether a domestic relations order is a QDRO?

No. A determination of whether an order is a QDRO is a question of fact that must be decided by a court. The Department will not issue opinions on essentially factual questions.

14. What happens if the employer merges with another company or the plan is terminated for some reason?

The rights of an alternate payee under a QDRO are protected in the event of plan amendments, a plan merger, a change in the sponsor of the plan or termination of the plan, to the same extent that rights of employees or beneficiaries are protected as of the date of the event. In effect, the alternate payee walks in the shoes of the employee whose pension he or she share.

15. What happens if the company sponsoring the plan goes bankrupt and the plan cannot meet its pension obligations?

The federal government provides an agency, the Pension Benefit Guaranty Corporation (PBGC), that insures pension benefits for most private companies. This agency will also become trustee if the plan cannot satisfy its obligations under its pension plan.

Not all plans are insured by PBGC. For example, most plans based on 401(k) contributions are not insured by PBGC. Similarly, PBGC does not become trustee for all plans that it insures. If the plan has enough assets to cover its obligations (as most do), then PBGC will not become trustee.

When an insured plan terminates without enough money to pay all guaranteed benefits, PBGC becomes trustee and pays the pension benefits, subject to certain limits on the amount and form. For instance, PBGC does not pay certain death and supplemental benefits. In addition, benefit amounts paid by PBGC are limited by ERISA, and the forms of benefit PBGC pays are also limited.

PBGC has special rules that apply to payment of benefits under QDROs. For example, if a QDRO is issued prior to plan termination, PBGC will not modify the form of benefit payable to an alternate payee specified in the QDRO. If, in contrast, a QDRO is issued after plan termination, PBGC will generally limit the form of benefit that PBGC will pay under the QDRO to the form permitted by PBGC in other circumstances (generally a single life annuity).

There are other special rules that apply to the administration by PBGC of QDROs. These rules are explained in PBGC's booklet, Divorce Orders & PBGC. Their information can be obtained by writing to PBGC QDRO Coordinator, P.O. Box 19153, Washington, D.C. 20036-0153, or by calling PBGC's Customer Service Center at 1-800-400-PBGC.