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June 11, 2007

DOL Clarifies QDRO Timing and Modification Rules

The Department of Labor (DOL) has issued interim final rules clarifying that the mere timing or modification of domestic relations orders will not disqualify them as qualified domestic relations orders (QDROs).1 Using several examples, the DOL guidance illustrates that a retirement plan administrator can qualify an order that otherwise meets the QDRO rules as a QDRO, even if the order is issued after certain events (e.g., a participant's death, benefit start date, divorce or after a prior QDRO) or even if it modifies a prior QDRO.

The DOL's guidance does not include many surprises, except perhaps that QDROs can be issued after a participant's death. However, it does leave certain key situations unaddressed (e.g., whether alternate payees are limited to "stream of benefit" payments2 under QDROs issued after a participant's benefit start date). The final regulations, which the Pension Protection Act of 2006 requires the DOL to issue by August 17, 2007, may clarify these issues.

BACKGROUND

A participant's benefits under a qualified retirement plan may not be assigned or alienated by creditors, with limited exceptions. One exception allows the plan administrator to assign part or all of a participant's benefits to an alternate payee (i.e., spouse, former spouse, child or other dependent) under a QDRO. To qualify as a QDRO, the order must meet the following key requirements:

  • State Law Order for Child Support, Alimony, Property Rights The order must be issued under state law and must relate to child support, alimony payments, or marital property rights of the alternate payee.
  • Identification of Relevant Parties and Other Issues The order must clearly identify the participant, alternate payee, and retirement plan to which the order applies; and identify (or provide how to determine) the amount or percentage of the participant's benefits to be paid to the alternate payee.
  • Limited to Benefits or Payment Forms Provided by Plan The order may not require the plan to pay benefits to another alternate payee under an order already determined to be a QDRO or to provide a type or form of benefit, or any option, not otherwise provided under the plan.
  • Segregation Rules While determining whether an order is a QDRO, a plan administrator must segregate the alternate payee's potential benefits for up to 18 months from the date the plan receives the order. If the plan administrator determines that the order is a valid QDRO within such period, the alternate payee must receive the award plus interest (if any) from the date the order was presented. Any determination after the 18-month period applies prospectively only.

SUMMARY OF THE NEW RULES

The DOL's interim rules clarify the following:

  • QDRO Timing DOL clarifies that an otherwise valid QDRO will not be disqualified merely because of its timing, that is, merely because it is issued subsequent to events, such as after a participant's death, start date or divorce. The table below summarizes the DOL's examples.
  • Subsequent QDROs The DOL clarifies that an otherwise valid QDRO can modify a prior QDRO. The table below summarizes the DOL's examples.
  • Orders Still Must Satisfy QDRO Rules The DOL emphasizes that, even though timing and modification of an order will not affect whether it is a QDRO, the order must still satisfy all the statutory requirements and protections to be deemed a QDRO, including the type or form of benefit, segregation of benefits, and previously assigned benefits. The table below summarizes the DOL's examples.
The DOL's Examples
Timing Example
After a Participant's Death A plan receives a defective order and determines it is not a QDRO. A subsequent order, which cures the defect, will not disqualify a QDRO simply because the participant dies before the subsequent order was issued.
After a Participant's Benefit Start Date A participant retires and starts receiving a life annuity under the plan, to which the spouse has validly consented. The parties subsequently divorce and later present a domestic relations order requiring the spouse to receive a "stream of payments" equal to half of each of the participant's future benefits.3 The order will not be disqualified as a QDRO simply because it is issued after the participant's benefits started.
After a Participant's Divorce A participant and spouse divorce. A subsequent domestic relations order requiring the plan to treat the former spouse as a "surviving spouse" will not fail as a QDRO simply because the former spouse no longer meets the plan's "surviving spouse" definition after the divorce.
Subsequent QDROs Example
Between Same Parties A participant and spouse divorce and present an order, which is deemed a valid QDRO by the plan. The QDRO awards part of the participant's benefits to the spouse; before QDRO payments begin, the parties present a second order that reduces the spouse's award. The second order will not fail as a QDRO solely because it is issued after a prior order and reduces benefits under that prior order.
Between Different Parties After they divorce, a participant and spouse present an order, deemed to be a valid QDRO by the participant's Section 401(k) plan, which allocates part of the participant's benefits to the spouse. Subsequently the participant marries and divorces spouse #2 and they present an order to the same §401(k) plan assigning benefits to spouse #2 that were not already allocated to spouse #1; the second order will not fail as a QDRO solely because it is issued after an earlier order pertaining to spouse #1 that was deemed a QDRO.
QDRO Rule Example
Type or Form of Benefit A divorced participant and spouse prepare an order assigning 50 percent of the participant's §401(k) benefits to the spouse, payable in installments; the participant dies after the order is submitted; the order is not disqualified as a QDRO merely because of the timing of the participant's death; however, the QDRO will be disqualified because the spouse requested payment in installments, a form of benefit that is not provided under the plan.
Segregation of Benefits A divorced participant and spouse present an order assigning benefits to the spouse to begin immediately. The plan administrator, who has segregated potential benefits to the spouse while determining if the order is a QDRO, finds that the order is not a QDRO; after the 18-month segregation period for the first order ends, the parties submit a second order seeking immediate benefits for the spouse. Even though the first segregation period has expired, the plan administrator must separately account for potential amounts to the spouse under the second order for up to 18 months.
Previously Assigned Benefits After a participant and spouse divorce, they present an order to the plan assigning part of the participant's benefits to the spouse. The plan accepts the order as a valid QDRO and assigns part of the participant's benefits to the spouse; the participant subsequently marries and then divorces spouse #2 and these parties submit an order to the plan which assigns to spouse #2 some of the benefits already assigned to first spouse under the prior QDRO. The second order does not fail merely because it is issued subsequent to the prior QDRO, but it does fail because it assigns part of the participant's benefits to spouse #2 already assigned under the prior QDRO to the first spouse.

IMPLICATIONS

In light of this latest guidance, now is a good time for retirement plans to make sure that they are complying with the QDRO rules in general, and in particular with the current guidance. This would involve a review of the plan's administrative forms, procedures, and/or plan documents and SPDs for compliance.

        

Segal can be retained to work with plan sponsors and their attorneys to determine the implications of the interim QDRO rules.

1 To see the interim final rules, click here. (To return to the Compliance Alert text, click here.)
2 A "stream of payment" approach awards the alternate payee a portion of the participant's benefit for the participant's life (e.g., a participant is receiving $100 per month for life; the QDRO awards the alternate payee 50 percent of the participant's benefit or $50 per month to be paid to the alternate payee during the participant's life). Although sanctioning the "stream of payment" method under a QDRO issued after a participant's benefit start date, the DOL does address whether an alternate payee could instead receive a "separate interest" (e.g., a separate benefit not tied to what the participant is receiving or to the participant's life). (To return to the Compliance Alert text, click here.)
3 See footnote 2 regarding "stream of payments." (To return to the Compliance Alert text, click here.)
 

Compliance Alert, The Segal Company’s periodic electronic newsletter summarizing important developments affecting benefit plan compliance, is for informational purposes only. It is not intended to provide authoritative guidance. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.


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