Pension or retirement plans can be significant assets that are part divorce settlements. But making sure that the payouts on these plans match the agreement the couple has reached requires some extra steps that cannot be avoided. That’s because retirement benefits can be subject to rules that are very different from those that apply to assets like houses. So it is critical to ensure that any agreement or order assigning rights to retirement benefits is handled correctly. What you need is called a Qualified Domestic Relations Order, or QDRO.
Many times it is not enough for divorcing spouses just to agree to divide retirement benefits. The reason is that most pension and retirement plans are governed by the Employee Retirement Income Security Act of 1974 (ERISA). ERISA governs any claim for benefits under such a plan. One of ERISA’s central tenets is that the written plan document governs all aspects of plan operation, and supersedes most state laws. So if the couple agrees to divide benefits in a manner that is different than the retirement plan provides, they need to document it with a QDRO that complies with ERISA, or the agreement will be unenforceable.
An example might help. Let’s say that James has a pension plan at work, providing for benefits payable to him after retirement and a lump-sum payable to his spouse when he dies. James is divorcing his current spouse, Carly. As part of their divorce, they have a formal agreement providing that half of the retirement benefit, and all of the death benefit, will be payable to Carly if she survives him. After his divorce, James marries Sara, retires and then dies. In this situation, the pension plan will pay whoever the plan says should be paid, in this case, the current spouse, Sara. This is because ex-wife Carly did not obtain a QDRO.
What is a QDRO?
ERISA defines a QDRO as an order that follows a state’s domestic relations laws. It relates to marital property rights (or child support, alimony, etc.) and recognizes the existence of an “alternate payee’s” right to receive ERISA benefits. The QDRO specifies exactly what the alternate payee is entitled to receive (and meets various other requirements).
Once a QDRO is issued, it must be sent to the pension or retirement plan, and the plan administrator determines whether it accepts the document as a valid QDRO. The plan’s determination will be based on written plan procedures and federal regulations. If the plan determines that the order is a valid QDRO, then the provisions of that QDRO will govern future distributions. If the plan determines that the order is not a QDRO, then further action will be necessary. This might include modifying the order or filing a lawsuit or challenging the plan’s determination.
Though this process may seem cumbersome, it is designed to simplify administration of retirement plans from the plan administrator’s perspective. The administrator is permitted to pay benefits to whoever the plan specifies, without having to be concerned with agreements made by participants or vague orders issued by some court or administrative agency.
What This Means
When the assets involved in a divorce include retirement benefit, a QDRO is a must. It’s easy to overlook this. Resolving the many issues that arise from a divorce is difficult and time-consuming enough that couples or inexperienced attorneys may overlook this, but it might all be wasted if the couple or their attorney does not follow the necessary steps to ensure that a QDRO is issued and recognized. The extra effort will make sure that the agreement a couple reaches will be carried out according to their wishes.