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Final QDRO Rules Require a Review of Plan Provisions and Procedures
The Department of Labor (“DOL”) has finalized a rule for qualified domestic relations orders (“QDROs”) that it originally published in 2007, and in the process clarified a few issues for plan administrators. One clarification may necessitate a plan amendment. The final rule takes effect August 9, 2010.
A QDRO is an order or judgment issued by a state court that assigns some portion of a participant’s retirement benefits under an employer-sponsored pension or profit sharing plan to the participant’s spouse, ex-spouse, child, or other dependent (known as an “alternate payee”) in connection with a divorce, marital separation, child support, alimony award or similar domestic relations action.
A plan administrator that receives a domestic relations order must confirm that it meets specific qualifications for QDROs set forth in the Internal Revenue Code (the “Code”) and the Employee Retirement Income Security Act of 1974 (“ERISA”). Notably, the administrator must ascertain that the order does not require the plan to provide “any type or form of benefit, or any option, not otherwise provided under the plan.” In addition, the order may not provide “increased benefits” on an actuarial basis beyond what would be paid to the participant or pay benefits to an alternate payee that are required to be paid to another alternate payee under another order previously determined to be a QDRO. If the administrator were to approve an order that fails to meet all statutory requirements, a distribution to an alternate payee pursuant to that order would violate broad Code and ERISA prohibitions against assignment of participants’ benefits.
A plan is required to have written procedures for determining whether an order served on the plan qualifies as a QDRO and how distributions will be administered if the administrator concludes that the order is a QDRO. These procedures also present the administrator with an opportunity to offer guidance to legal counsel who are preparing orders so that their proposed orders accord with the plan’s terms, the goal being to reduce the number of non-compliant orders that the administrator has to reject.
A QDRO can be issued before or after a participant has begun receiving retirement benefits from the plan, that is, before or after the participant’s “annuity starting date.” Clearly, if an order is issued before the participant retires, the issues are more manageable.
The DOL maintains that QDROs issued after the participant’s annuity starting date are not objectionable, per se, but recognizes that such orders may present complications, particularly when payments are being made in the form of an annuity.
Taking an uncomplicated case first, if after a participant’s annuity starting date, a QDRO is issued that assigns to an alternate payee a portion of the stream of retirement payments then being paid to the participant, it is simple enough for the administrator to divide the periodic payments between the participant and the alternate payee. For example, if the participant’s benefit is being paid in the form of a single life annuity of $1,000 per month and the QDRO requires one-half the payments be paid to the alternate payee, the plan will begin issuing two monthly checks of $500 each upon acceptance of the QDRO. The form of benefit remains a single life annuity for the participant’s life.
By contrast, if a post-retirement order requires the plan to divide the participant’s current annuity benefit into separate interests, with the alternate payee selecting the form of benefit payment for his or her interest, complying with such an order would require the reannuitization of the participant’s benefit, that is, the recalculation of the amount of the benefit beginning with a reset annuity starting date. Thus, if in the prior example, the order had stated that one-half the retirement benefit must be paid to the alternate payee in the form of equal installment payments over five years, the participant’s annuity would necessarily have to be reduced to provide for the alternate payee’s benefit. The DOL’s final rules permit this, but only if “the plan specifically provides for such an option.” In other words, for the administrator to approve the order in the example, such installment payments must otherwise be an available form of distribution under the plan and the plan must specifically allow reannuitization of the participant’s current benefit.
By clarifying that a plan must specifically provide for reannuitization, the DOL is bringing order to QDRO practices, which can be contentious and confusing for all involved. Returning again to the previous example, if the specific terms of the plan do not authorize reannuitization of the participant’s benefit, the administrator could reject the order without further deliberation or negotiation, thereby sending the parties back to court for a revision of same to provide for a division of the stream of benefit payments.
Plan sponsors may now wish to review current practices and consider whether or not amending their plans in this regard would simplify QDRO dispositions. In any event, the plan’s QDRO procedures must accord with the terms of the plan.
Assignment of Death Benefit
The DOL notes that notwithstanding its position that a QDRO may be issued in respect of retirement payments that have already begun, a QDRO may not award to an alternate payee a death benefit that is payable to another beneficiary pursuant to the form of distribution then in effect for the participant. For example, if the participant began receiving benefits in the form of a joint and survivor annuity with his or her child as the beneficiary, the participant’s former spouse could not supplant the child as the death beneficiary by means of a QDRO. As previously described, however, if plan provisions permit, a QDRO could require that the participant’s joint and survivor benefit be reannuitized to afford a separate interest benefit to the alternate payee. This would reduce the overall dollar amount of the benefit payable to the participant and the participant’s child, but would leave the participant’s existing joint and survivor form of benefit undisturbed.
The DOL also clarified that a domestic relations order issued after the death of a plan participant may nevertheless qualify as a QDRO, whether or not the administrator has notice of the QDRO before the participant’s death. An example in the 2007 regulations had raised a question about this.
Questions regarding this advisory should be addressed to Patricia Matzye (212-238-8730, email@example.com).
Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
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