Qualified Domestic Relations Orders (“QDROs”) are unique since they are governed by three distinct bodies of law: ERISA, The Internal Revenue Code (“IRC” or the “Code”), and state law. ERISA provides the procedural rules. The IRC provides tax implications. State law provides the substance of the award. State law is the most significant governing body of law since it determines how and what benefits are assigned to an alternate payee. All three governing bodies of law should be considered together when addressing any QDRO related issue.
ERISA: Congress enacted the Employee Retirement Income Security Act (“ERISA”) in 1974 to combat the improper practices associated with private pension plans. Congress created the QDRO in 1984 when it amended ERISA under the Retirement Equity Act (“REAct”). The central purpose of REAct is to provide enhanced protection to spouses and dependent children in the event of divorce. Prior to the creation of QDROs, a former spouse could not be assigned benefits from a qualified ERISA-based plan. In essence, a QDRO is the “exception” to ERISA’s anti-alienation rule. See ERISA § 206(d)(1).
IRC: Many provisions of the IRC duplicate provisions under ERISA. This duplicate structure is primarily due to the jurisdictional fight between the Department of Labor and the Internal Revenue Service. For practical purposes, the IRC provides the tax consequences for implementation of a QDRO.
State Law: State law determines what benefits are assigned to a former spouse. Specifically, state law will decide if the former spouse is to receive survivor benefits, COLAs, and early retirement subsidies, all of which may have an impact on the award. State law, however, must be applied along with ERISA and the IRC. None of the three governing bodies of law operates in a vacuum.
Qualified ERISA-Based Plans:A QDRO is primarily used to assign retirement benefits to a former spouse. QDROs are primarily targeted at qualified ERISA-based plans. A qualified ERISA-based plan is an employee benefit plan that consists of a “qualified trust” as defined in IRC § 401(a)(13). Only a QDRO may divide such a plan without penalty. See IRC § 401(a)(13)(B), 402(e)(A), 414(p).
QDROs may also be used to divide plans that are not qualified ERISA-based plans such as 403(b)s and 457 plans. See IRC § 414(p).
Power of a QDRO:It is important to understand the power of a QDRO. A QDRO is the most efficient judicial enforcement device ever created for several reasons: 1) Enforcement of the award is a non-issue since benefits are assigned directly from the plan to the alternate payee. A participant’s cooperation is inconsequential. 2) A QDRO severs the parties’ economic ties; this reality may be worth its weight in gold to your client. 3) ERISA and the IRC make it difficult for a participant to access or move the award monies due to penalties, restrictions, and holds that may be placed on the account pending the submission of a QDRO.
Implementation of a QDRO may also have a significant psychological effect on a plan participant. In many cases, the participant has worked all his or her life to build a retirement “nest egg.” In the participant’s eyes, the retirement plan is separate property, period, regardless of what the judge may say. Accordingly, a participant’s perspectives and priorities may change when his or her pension is put at risk. The mere mention of dividing the participant’s pension may lead to compromise or settlement. Use the power of a QDRO to your client’s advantage.
For more information on QDROs and legal malpractice, please visit:
Qualified Domestic Relations Orders: Strategy and Liability for the Family Law Attorney (LexisNexis © 2016)