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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