It has been estimated that more than one half of all first marriages end in divorce; the number of failed marriages is even higher for second marriages. One major issue in most divorces is the division of property. Commonly, a large portion of the marital assets consist of rights in or payments from one or more pension plans.
Pension Plans and ERISA
Divorce and division of property are generally controlled by state law. However, when state law contradicts or is inconsistent with federal law, the federal law "preempts" the state law; federal law controls the outcome. In 1984, Congress passed the Employee Retirement Income Security Act (ERISA), which governs most private pension plans (government and some other plans are not covered).
Federal law prohibits the assignment of pension benefits in ERISA plans. This appeared to include transfers to a spouse during divorce, regardless of a state court decision on division. To remedy this, the Retirement Equity Act of 1984 (REA) established an exception to the rule through use of a "QDRO."
Qualified Domestic Relations Orders (QDRO) and Pension Plans
Often in a divorce, the state court will issue a domestic relations order (DRO) or other judgment dividing the marital property. If the division of an ERISA pension plan interest is part of the order, however, a QDRO must be prepared and signed by the court (or sometimes another entity – especially in the case of child support) to ensure that the order will actually be enforceable and recognized by the plan administrator, and the division will not lead to unwanted tax consequences.
A QDRO creates or recognizes an "alternate payee’s" right to receive all or a portion of the plan benefits, or actually assigns that right to the alternate payee. An "alternate payee" may only be a spouse, former spouse, child, or other dependent of the plan participant.
Types of Retirement Plans
Whether a pension plan is divisible as a marital asset depends on local law and the terms of the plan itself. Defined benefit plans, defined contribution plans and IRAs are all subject to division in a divorce:
- Defined Benefit Plan: Usually a retirement plan through an employer where the employee becomes entitled to receive a defined sum after being employed for a specified number of years ("vested"). The actual amount paid after retirement is usually based upon salary and years of service at the time of retirement. Such plans are more difficult to split, as the current worth of such a plan is difficult to calculate.
- Defined Contribution Plan: Typically a savings, 401(k) type or profit sharing plan through an employer. Such plans are easier to divide, as the current value is usually obvious.
ERISA, as amended by REA, defines a DRO as a judgment, decree or order which both:
- Relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child or other dependent of an ERISA plan participant; and
- Is made pursuant to a state domestic relations law, including community property if the state recognizes community property law.
ERISA requires that, to be effective, a QDRO must be a judgment, decree, or order of a court that meets the above requirements and contains the following information:
The name and last known addresses of the plan participant and each alternate payee;
- The name of each plan to which the QDRO applies;
- The dollar amount or percentage (or method for determining the dollar amount or percentage) of the benefit to be paid to each alternate payee; and
- The number of payments or period of time to which the QDRO applies.
Provisions That a QDRO Must Not Contain
Payment of any benefit or any payment option to the alternate payee that is not authorized by the ERISA plan
- Payment of increased benefits, determined based on actuarial value
- Payments to an alternate payee that are already designated for another alternate payee in an earlier QDRO
ERISA plans must establish a reasonable, written procedure for evaluating a QDRO and often provide a guide for what is necessary and acceptable. Some even provide a model QDRO form. The plan administrator must approve the QDRO before it becomes effective.
The QDRO may first be submitted to the court for approval and signing, but most seek prior approval by the plan administrator, to save the effort and expense of having to go back to the court to obtain another QDRO, if the plan administrator rejects it. The plan administrator is obligated to give explanations for any rejection; no fee may be charged for considering the QDRO. The plan administrator’s rejection may also be appealable in federal court.
After the QDRO has been accepted by the plan administrator and approved and signed by the court, it becomes enforceable in federal court by the alternate payee.