It Ain’t Over Until the QDRO Has Been Approved: The Process for Distributing Retirement and Pension Funds Post-Divorce

by Eleanor A. Hunt
May 14th, 2014

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Once a divorce matter has been filed and the Court sets a trial date, most clients mistakenly mark their calendar with the belief that upon conclusion of the trial, every aspect of their divorce case will be over.  However, if the client or their spouse has retirement or pension accounts that constitute marital property and are ordered to be distributed from one party to another (in full or in part), then there will most likely be several post-trial steps associated with the distribution that must occur before the case can be officially considered concluded.

If the proper steps are not taken, then beware, contentious proceedings can, and have been known to, occur post-divorce associated with the distribution of retirement and pension funds. In a nutshell, if  the retirement or pension plan that is to be distributed is governed by The Employee Retirement Income Security Act of 1974 (hereinafter referred to as ERISA), then the appropriate Qualified Domestic Relations Order (“QDRO”), or its counterpart, will need to be drafted, agreed upon and executed by counsel, filed with and executed by the Court, and then filed with the retirement or pension plan’s Plan Administrator and subsequently approved, prior to the separation or disbursement of funds. What is ERISA? ERISA (codified at  29 U.S.C. §1001 et seq.) was enacted, in part, to protect the interests of employees who participated in employer-sponsored pension plans.  This federal law sets forth minimum standards for most voluntarily established, private sector, pension or retirement plans, which standards include but are not limited to the following: (1) plans must provide each participant with plan information; (2) plan managers and those who control plan assets are subject to specific fiduciary responsibilities; (3) plans are required to establish a grievance and appeals process in order for participants to get benefits from their plans; and (4) participants are provided with the right to sue for benefits and breaches of fiduciary duty. What has been termed the “anti-alienation” provisions of ERISA prevent the assignment or distribution of the proceeds of an ERISA qualified plan to third parties.  29 U.S.C. § 1056(d)(1).  Furthermore, when Congress enacted ERISA it was intended that this law would be preemptory in nature and that it would “supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan described in 29 U.S.C. § 1003(a) . . .”  29 U.S.C. § 1144(a).  See also Potts v. Potts, 142 Md. App. 448, 455, 790 A.2d 703, 708 (2002).  The combination of the anti-alienation and preemption provisions raised a question with the courts as to “the validity of orders entered in State domestic relations proceedings requiring that pension benefits be paid to a person other than the plan beneficiary.”  See id. (citing to Rohrbeck v. Rohrbeck, 318 Md. 28, 32, 566 A.2d 767, 769 (1989)). While considering what eventually became enacted as the Retirement Equity Act of 1984, Congress provided clarification regarding both issues, stating that

if a domestic relations order requires the distribution of all or a part of a participant’s benefits under a qualified plan to an alternate payee, then the creation, recognition, or assignment of the alternate payee’s right to the benefits is not considered an assignment or alienation of benefits under the plan if and only if the order is a qualified domestic relations order.  Because rights created, recognized, or assigned by a qualified domestic relations order, and benefit payments pursuant to such an order, are specifically permitted under the bill, State law providing for these rights and payments under a qualified domestic relations order will continue to be exempt from Federal preemption under ERISA.

See Rohrbeck, 318 Md. 28 at 33 (citations omitted) (emphasis added).  In other words, courts were provided with the authority to execute orders allowing benefits to be paid to someone other than the plan beneficiary through the means of a QDRO.  “From a practical point of view, a QDRO allows divorcing parties to avoid a lump sum payment and the tax consequences that accompany such a payment.”  See Freedenburg v. Freedenburg, 123 Md. App. 729, 751, 720 A.2d 948 (1998). For a broad overview of the historical development of QDROs, refer to the following Maryland case law: Rohrbeck v. Rohrbeck, 318 Md. 28, 566 A. 2d 767 (1989); Potts v. Potts, 142 Md. App. 448, 790 A. 2d 703 (2002); and Dennis v. Fire & Police Employees Ret. Sys., 390 Md. 639, 651, 890 A. 2d 737 (2006). What is a Qualified Domestic Relations Order (QDRO)? And What Language Must Be Included Within the QDRO? The law defines a “qualified domestic relations order” as a domestic relations order that meets certain requirements that are set forth in the statute.  First, the order must constitute a “domestic relation order,” which is defined as: any judgment, decree, or order (including approval of a property settlement agreement) which- (i) relates to the provision of child support, alimony payments, or marital property rights to a spouse, child, or other dependent of a participant, and (ii) is made pursuant to a State domestic relations law (including a community property law). 29 U.S.C. § 1056(d)(3)(B)(ii). The order must also meet three additional requirements: (1) It must create or recognize the existence of an alternate payee’s right to, or assign to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under a plan (29 U.S.C. § 1056(d)(3)(B)(i)); and (2) Procedurally, in order to be recognized as a QDRO by the QDRO Plan Administrator, the QDRO must clearly specify the following: (i) the name and last known mailing address of the alternate payee and the participant; (ii) the amount or percentage of the participant’s benefits to be paid by the plan to the alternate payee (or the manner in which the amount or percentage is to be determined); (iii) the number of payments or the period to which the order applies; and (iv) each plan to which the order applies. (29 U.S.C. § 1056 (d)(3)(C)).[1] And, (3) It: (i) does not require a plan to provide any type or form of benefit, or any option, not otherwise provided under the plan, (ii) does not require the plan to provide increased benefits (determined on  the basis of actuarial value), and (iii) does not require the payment of benefits to an alternate payee which are required to be paid to another alternate payee under another order previously determined to be a qualified domestic relations order. 29 U.S.C. § 1056(d)(3)(D). At a minimum, the QDRO must be in compliance with the aforesaid provisions. Practically speaking, a QDRO is typically a separate Order, executed by counsel for both parties, and submitted to the Court post-divorce.  However, note that ERISA does not require that a QDRO be part of the actual judgment of absolute divorce, but if counsel is able to prepare and have opposing counsel approve the QDRO in advance of trial or the uncontested divorce proceeding, then the QDRO may be filed with the Court at the time the judgment of absolute divorce is granted, as a way to expedite the process. How Do I Know if my Pension Plan or Retirement Account is Governed by ERISA? If your pension or retirement plan is governed by ERISA, then your employer is required to provide participants and their beneficiaries with the following specific documents about the plan: (1) the summary plan description; (2) the summary of material modification; (3) an individual benefit statement; (4) if the plan allows the participant to direct their own investments, then, on a regular basis, the plan is required to make participants aware of their rights and responsibilities under the plan regarding directing their investments, which includes information about fees and expenses; (5) an automatic enrollment notice (if applicable); (6) a summary annual report; and (7) any applicable black out period notices. The summary plan description is given to employees after they join the plan (and to beneficiaries after they first receive benefits) and this document will contain language related to whether the plan is governed by ERISA.  Furthermore, the summary plan description is supposed to provide a plain language description of the plan, describes plan features, what to expect of the plan, and it is required to be comprehensive enough to apprise participants of their rights and responsibilities under the plan.  A copy of the plan is also required to be provided upon request. What Are The Procedural Steps For Filing a QDRO and Obtaining Approval? If the parties reach a settlement of their case, which involves the distribution of retirement or pension funds from one spouse to another, or the trial court issues an opinion ordering the same, and it is clear that the plan is governed by ERISA, then the proper QDRO needs to be prepared, signed by counsel (and sometimes the parties), filed with the Court, executed by the Judge, and then submitted to the plan administrator for approval along with a certified copy of the QDRO, the Parties’ Judgment of Absolute Divorce (and settlement agreement, if applicable). Each plan governed by ERISA is required to have a clearly defined process for handling the submission of QDROs.  Therefore, counsel should contact the plan administrator in advance of submitting the QDRO in order to obtain the specific details regarding this process. What Happens After the QDRO Has Been Submitted to the Plan Administrator? As the Court of Appeals made clear in Rohrbeck,

The law requires each plan to establish ‘reasonable procedures to determine the qualified status of domestic relations orders and to administer distributions under such qualified orders.’ 29 U.S.C. § 1056(d)(3)(G)(ii); [I.R.C.] § 414(p)(6)(B).  Upon receipt of a domestic relations order, the plan administrator must notify the participant and the alternate payee of the receipt of the order and the plan’s procedures for determining its qualified status.  The administrator has ‘a reasonable period’ of up to 18 months in which to determine that status and inform the parties of the decision.  See  29 U.S.C. § 1056(d)(3)(G)-(H); [I.R.C.] § 414(p) (6)-(7).

Rohrbeck, 318 Md. at 35, 566 A.2d at 771.  From a practitioner’s perspective, once the QDRO has been sent to the plan administrator, if counsel or his or her client has not received confirmation that the QDRO has been received by the plan administrator within a month from the date it was mailed out, then counsel should follow up with the plan administrator to confirm receipt, as well as to obtain a time estimate for how long the review and approval process will take. Do QDRO’s Apply to All Retirement or Pension Plans? No. IRA’s, tax-sheltered annuities under Internal Revenue Code § 403(a) and (b), governmental plans and church plans are not governed by ERISA in this regard.  As a result, the terms of the plan and applicable law govern what documents are required to be executed in order for these funds to be distributed post-divorce. Can QDRO’s Be Used For Purposes Other Than Distributing Pension/Retirement Funds in a Divorce Case? The use of QDRO’s is not limited to divorce matters. QDRO’s can also be utilized for purposes of collecting child support or spousal support, which includes the collection of past-due child support or spousal support arrearages.

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[1] Note that ERISA, 29 U.S.C. § 1056(d)(3)(K) states that the term alternate payee means “any spouse, former spouse, child, or other dependent of a participant who is recognized by a domestic relations order as having a right to receive all, or a portion of, the benefits payable under a plan with respect to such participant.” Section 1056(d)(3)(J) indicates that “a person who is an alternate payee under a qualified domestic relations order shall be considered for purposes of any provision of this Act a beneficiary under the plan.”

When her clients are involved in thorny family law matters, Eleanor Hunt is ready and willing to go into battle. An experienced courtroom advocate, Eleanor takes pride in those cases where JGL’s team wins trial victories in difficult cases. But she also realizes that the best result for many clients is a fair settlement that resolves the case without the time and risk inherent in going to trial.

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