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QDRO’s – From The ABC’s to the PPA – General Overview, Current Developments, Special Situations and Other Misconceptions
Gary NaglerGary A. Nagler & Associates, PLLC
July 5, 2007
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WHAT IS A DOMESTIC RELATIONS ORDER (DRO)?
A judgment, decree or order, made pursuant to a state’s domestic relations or community property law, which relates to the provision of child support, alimony, or marital property rights to a spouse, former spouse, child or other dependent of a plan participantEstablished as a result of the Retirement Equity Act of 1984, for the protection of spouses from the loss of pension benefits to which they may be entitledPursuant to Code §414(p) and ERISA §206(d)
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WHAT IS A QUALIFIED DOMESTIC RELATIONS ORDER (QDRO)?
A DRO that meets certain requirements specified under the law, is order by the appropriate court, and is approved by the Plan Administrator
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WHAT PLANS REQUIRE A QDRO?
Defined Benefit Plans
Defined Contribution Plans
403(b) Tax Sheltered Annuity Plans
457 State/Local Government Deferred Compensation Plans
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WHAT PLANS DO NOT REQUIRE A QDRO?
IRA’s
SEP’s
SIMPLE’s
Non-Qualified Plans
Governmental (Federal, state, local or political subdivision) Plans
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QDRO STATUTORY REQUIREMENTS
Name and address of participant and alternate payee
Name of plan to which order applies
Amount of alternate payee account/benefit
Manner of determination of alternate payee account/benefit
Duration of payment.
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QDRO ADMINISTRATIVE REQUIREMENTS
Investment returnLoansVestingCommencementDeath Benefits
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WHAT ELSE IS NEEDED IN A QDRO?
Enforcement against plan administrator
Release of plan
Court retains jurisdiction
Maintaining addresses
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WHAT MAY A QDRO NOT ORDER?
Cannot require plan to provide any type or form of benefit or option not otherwise provided in the plan
Cannot require plan to provide increased benefits determined on the basis of actuarial value
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WHAT ELSE MAY A QDRO NOT ORDER?
Cannot require the payment of benefits to an alternate payee which are required to be paid to another alternate payee under another QDRO
Cannot order payment of the alternate payee’s benefit in the form of a joint and survivor annuity to the alternate payee and a subsequent spouse
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WHEN MAY BENEFITS COMMENCE?
Primarily dependent on plan provisions
Secondarily dependent on the provisions of the QDRO
Can always require payment on or after the date on which the participant attains the earliest retirement age
Earliest retirement age is the earlier of the date of entitlement to a distribution, or the earlier of attainment of age 50 or the earliest date the participant could begin receiving benefits if he/she terminated
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FORM OF QDRO
Custom drafted
Risk of required changes
Benefit of pre-certification
Use of model language or order
Hierarchy of focus – plan administration, then participant, then alternate payee
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NEW DEVELOPMENTS –PPA 2006
DOL directed to issue regulations addressing subsequently issued QDRO’s
Regulations issued 5/7/07:
Subsequent DRO may change division of benefits before payments commence
Subsequent DRO is a QDRO notwithstanding existence of prior QDRO to another alternate payee as long as benefit to be assigned is available
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NEW DEVELOPMENTS –PPA 2006
Regulations issued 5/7/07:
Subsequent DRO after 18 month segregation period starts new 18 month period
If DRO has defects, corrective order can be qualified as QDRO even after death
DRO’s issued after divorce can still treat the ex-spouse as the surviving spouse for death benefits
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WHAT ARE THE “NORMAL” TYPES OF QDROS?
Defined Contribution Plans (P/S, 401(k), MP, ESOP)
Otherwise known as account balance plan
Divide account balance either by percentage or amount
Primarily dependent on plan provisions
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WHAT ARE THE “NORMAL” TYPES OF QDROS?
Defined Benefit Plans
Contribution unknown
Monthly or annual benefit derived by formula at retirement age
Independent or separate interest approach
Shared interest approach
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DEFINED BENEFIT QDRO’s – SEPARATE INTEREST
Adjusts the amount of award to be paid over the lifetime of the alternate payee, not the participant
Amount of the benefit is converted to a payment based on the age of the alternate payee
Actuarial equivalence issues
Alternate payee and participant may choose different commencement dates
If alternate payee predeceases, benefit may revert
Not always permitted by particular plan
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DEFINED BENEFIT QDRO’s – SHARED INTEREST
Benefits are adjusted over the lifetime of the participantRequires death benefit language both pre- and post-retirement in the event the participant predeceasesIf alternate payee predeceases, benefit revertsOnly method permitted if the participant has already retired and is in pay statusParticipant must begin receiving benefits for the alternate payee to receive benefits
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SPECIAL DEFINED BENEFIT ISSUES
Subsidized benefits
Cost of living adjustments
Post-retirement increases
Lump sum payments
Death benefits
Plan investment return
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GENERAL PROBLEMS/ISSUES
Correct name of plan
Correct type of plan
Division date
Loan issues
Subsequent contributions in DC plan
Benefit formula changes in DB plan
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SPECIAL ISSUES
Same Sex QDRO’s – Not qualifiable as a QDRO, even if sponsor extends benefits
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SPECIAL SITUATIONS & MISCONCEPTIONS
Defined Benefit vs. Defined Contribution Plans – Understanding the Difference
Language used for various issues
Methodology of split
Forms of payment
Timing of payment
Death Benefits
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SPECIAL SITUATIONS & MISCONCEPTIONS
Cash Balance Defined Benefit Plans
Account balance notwithstanding defined benefit nature
Difficulty in ascertaining nature of plan, and need to know!
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SPECIAL SITUATIONS & MISCONCEPTIONS
403(b) and 457 Plans
ERISA 403(b) v. non-ERISA 403(b)
457(b) Eligible v. 457(f) Ineligible
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SPECIAL SITUATIONS & MISCONCEPTIONS
Defined Benefit Plans
Specifying alternate payee account in the form of a lump sum
Special considerations
Plan rules