DOL Issues Final Regulations on Timing and Order of QDROs

DOL Issues Final Regulations on Timing and Order of QDROs

On June 10, 2010, the Department of Labor (DOL) issued final regulations on the timing and order of domestic relations orders (DROs). These final regulations provide plan administrators, service providers, participants and alternate payees with further guidance regarding when a DRO will satisfy the qualified domestic relations order (QDRO) requirements of the Employee Retirement Income Security Act of 1974, as amended (ERISA). This guidance is primarily in the form of examples, but these examples should not be interpreted as being the only situations in which a DRO can be determined to meet the requirements of a QDRO. The final regulations will become effective August 9, 2010. Plan administrators should review their plans' QDRO procedures to assure that they comply with the final regulations.

Background

Generally a participant’s benefit in a qualified retirement plan may not be assigned or alienated. However, the Internal Revenue Code (Code) and ERISA establish a limited exception to this prohibition by providing that a retirement benefit may be assigned to a participant’s spouse, former spouse, child or other dependent (alternate payee) pursuant to a legal order as a result of a participant’s divorce or separation. These orders are known as QDROs. A plan administrator generally must determine, in accordance with required established procedures and within a certain time period, whether a DRO attempting to divide a participant’s benefit under a plan meets the applicable requirements of a QDRO. While some of the requirements of a QDRO are relatively straightforward (e.g., the name of the retirement plan must be provided), others are not as easily discernable. These final regulations (issued as a result of a directive under the Pension Protection Act of 2006) attempt to minimize the confusion associated with the timing and/or order of a QDRO, such as:

1. a QDRO issued after a participant’s death;

2. a QDRO issued after benefits have begun to be distributed; and

3. a subsequent QDRO that attempts to modify an existing QDRO.

Final Regulations

These regulations are intended to reduce the cost associated with uncertainty and increase plan administration efficiency by providing clarification in the following three areas:

Subsequent Domestic Relation Orders

Under the final regulations, a DRO otherwise meeting the QDRO requirements will not fail to be a QDRO solely because it is issued after, or revises, another QDRO. For example, a second QDRO is valid under the final regulations if it is issued for the same participant and alternate payee as the first QDRO, and the second QDRO either reduces or increases the benefit payable to the alternate payee. A second QDRO also is valid if it involves the same participant and a new alternate payee (e.g., second spouse), and the second QDRO assigns to the new alternate payee benefits not already assigned to the first alternate payee.

Timing of Domestic Relations Orders

A DRO otherwise meeting the QDRO requirements will not fail to be a QDRO solely because of the time it is issued. For example, a DRO provided to a plan administrator after a participant’s death will be treated as a QDRO as long as it complies with the QDRO requirements. It is not required that a plan administrator be notified of such an order prior to a participant’s death.

Additionally, a DRO issued after benefit payments have commenced to a participant may still qualify as a QDRO. For example, assume a participant retires and begins to receive benefits in the form of a single life annuity equal to $1,000 per month. The participant and spouse subsequently divorce, and a DRO is issued requiring 50 percent ($500) of the participant’s future monthly annuity to be paid to the former spouse. Such a DRO will not fail to meet the QDRO requirements if all of the other QDRO requirements are met. However, assume that the DRO had required payments to the former spouse for the former spouse’s lifetime which would cause the plan to reannuitize the retirement benefit. If the plan does not permit such a change after the participant's annuity starting date, the DRO would fail to meet the QDRO requirements – not due to timing – but rather because such a provision would require the plan to provide a type or form of benefit or option (i.e., the reannuitization of the participant's benefit) not otherwise provided under the plan.

Requirements and Protections under ERISA

A DRO will only be considered a QDRO if it complies with the same requirements and protections that apply to all QDROs under ERISA and the Code. For example, if a participant’s death occurs prior to his or her commencement of benefits and a DRO assigns 50 percent of the participant’s 401(k) benefit to the former spouse to be paid in monthly installments over a 10-year period (a distribution form not provided under the plan), the DRO will fail to meet the QDRO requirements due to its request for a form of payment not provided under the plan. Similarly, a DRO that attempts to assign previously assigned benefits to an alternate payee under another QDRO will fail to meet the QDRO requirements. For example, a divorced participant, who has a portion of his benefits assigned to his former spouse pursuant to a QDRO, remarries and subsequently divorces his second spouse. If a subsequent DRO pertaining to "spouse two" assigns benefits already assigned to "spouse one," the DRO will fail to be a QDRO.

Note for Governmental Plans

A governmental plan is not required to honor QDROs. However, under Code Section 414(p)(11), if a governmental plan (a governmental 401[a] plan or a 457[b] plan) honors DROs, those DROs shall be treated as QDROs. As a result, many governmental plans follow the QDRO rules in their plans. These final regulations may be of interest to those plans.

If you have questions regarding the final regulations, or if you desire assistance in reviewing your existing QDRO procedures to ensure compliance, please contact Craig Burke, or your Ice Miller LLP employee benefits attorney.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.