Qualified Domestic Relations Orders - 101

Whether this is a refresher course or a beginner’s is unimportant. We are aware that many attorneys do not know what they can or can not do with a Qualified Domestic Relations Order (QDRO) and are not that familiar as to how to protect themselves or their client’s interest when employing an order for distribution purposes. This article will deal with the basics and give you tips so you don’t get yourself in trouble. I will be dealing with ERISA based orders but much of what I say also applies to non-ERISA based public plans.

Allow me to list some basics, of which we all should be aware.

1. If the specifics of the distribution (including survivorship) are not spelled out in the final decree or settlement agreement, your options for the order for your client are very limited. The key to an equitable order is a well drafted settlement agreement.
   
   
2. You can not use a QDRO for payment of your legal fees. A QDRO can only provide direct payment to a former spouse or the guardian of any children if the QDRO is being used for child support.
   
   
3. The QDRO has to be drafted to properly address the requirements of the plan. The retirement plan administrator is the final arbiter of whether a QDRO is qualified under the rules of ERISA and IRS. The local court does not have jurisdiction in this matter. If you feel the plan is not complying with the laws governing domestic relations order you have to bring action in a federal court in an attempt to get compliance. It is an action under the ERISA statutes.
   
   
4. Technically, unless the plan receives an order, signed by the judge, prior to the death of the participant, the order is null and void. We are aware of some situations where attorneys have submitted unsigned orders for prior approval that were honored by plans when the participant died while the order was awaiting approval but plans are under no legal obligation to honor unsigned orders. Even if a signed order is rejected, the portion awarded to the alternate payee is preserved in the event of the death of the participant. Working with the plan, the attorney has 18 months to perfect the order. You are taking a real chance when you try to get prior approval because if the participant were to die, your client could receive nothing. Attorneys like to get prior approval so they won’t have to go back for the Judge’s signature twice. Not a very good defense if your client were to lose their interest in a substantial retirement asset because of your failure to submit a signed order.
   
   
5. For the same reasons cited in the previous paragraph, it is very important to submit the order in a timely manner. We always suggest the order be submitted to the Judge concurrent with the final decree. If that is done, and the order is immediately submitted to the plan, the potential death of the participant should not obviate the terms of the settlement.
   
   
6. The attorney representing the alternate payee should always assume responsibility for the drafting of the order. It is their client whose interest has to be protected and it is the only way you can be sure the order is properly submitted in a timely manner. The attorney representing the participant reviews the order to be sure it complies with the terms of the settlement.
   
   
7. In today’s dynamic economy mergers and acquisitions have become the norm.        Always include a statement in the order that the order “applies to any successor plans”. It may not afford your client full protection if the plan is terminated but its absence could be disastrous in the event the existing pension is rolled into the acquiring company’s plan. Also, a statement that the “court reserves the right to modify the order” is required because if the settlement does not comply with the plan’s provisions and there is no way to craft language that will get around this, and maintain the intent of the settlement, it may be necessary to renegotiate the terms.
   
   
8. Many plans have model domestic relations orders. A model order is a sample order preformatted to comply with the provisions of the plan as interpreted by the plan’s trustees and their advisors. Many private and public employer plan sponsors make these model orders available to attorneys (and individuals) drafting domestic relations orders and many attorneys use them to finalize their divorce cases. Unless you are very knowledgeable about actuarial assumptions and the Retirement Equity Act of 1984, I strongly advise against their use if you are dealing with a defined benefit plan (pension). The majority of model orders that I have seen are crafted to the benefit of the plan participant and do not even allude to the fact that there are many options available to an alternate payee that should be addressed in the domestic relations order. Contrary to the impression the plan provider is trying to create, theirs is not the only way to draft an order. Under the Retirement Equity Act of 1984 they are required to accept any order as long as it complies with the federal and state laws that govern. We often use the plan’s model order as a starting point so the reviewer will have some familiarity with the language and format but modify it to address the settlement provisions.

I hope the foregoing is helpful whether it is new information or it is just jogging your memory. QDRO’s are an excellent settlement tool and the better their limitations and strengths are understood by the attorney, the more often they will find themselves using them. A Defined Contribution Plan (401(k) plan, etc.) QDRO is often the only way the parties can get immediate access to substantial funds to settle marital debt issues. They also can be used for back child support problems. The more you know and understand about Qualified Domestic Relations Orders, the more valuable their use to the Family Law practitioner will be.