Under IRC §414(p)(1)(B) of the IRC and §206(d)(3) of ERISA, a domestic relations order is a judgment, decree, or order, including approval of a property settlement agreement, relating to child support, alimony, or the marital property rights of a spouse, former spouse, child, or other dependent of the participant.[1] Further, the order must be made pursuant to the domestic relations law (including community property law) of a state.[2]
IRC §414(p) only applies to plans subject to the anti-alienation rule of IRC §401(a)(13). Therefore, §414(p) does not apply to IRAs, and it is inappropriate to refer to a domestic relations order affecting an IRA as a QDRO. Rather, the taxation of an IRA divided in a divorce is governed by IRC §408(6), where the entire problem (in contrast to §414(p)) is handled adequately in two sentences.
A qualified domestic relations order (QDRO) is a domestic relations order which creates or recognizes the existence of right of an alternate payee,[3] or assigns to an alternate payee the right, to receive all or a portion of the benefits payable with respect to a participant under a plan,[4] and which, in addition, meets the requirements of IRC §414(p)(2) and (3).[5]
Under IRC §414(p)(2), the Order must clearly specify a number of matters.
The Order must clearly specify the name and last known mailing address (if any) of the participant and the name and mailing address of each alternate payee covered by the order.[6] (Note, however, that the committee reports of the Senate Finance Committee state that an order will not be treated as failing to be qualified merely because the order does not specify the current mailing address of the participant and alternate payee if the plan administrator has reason to know that address independently.)
The Order must clearly specify the amount or percentage of the participant's benefits to be paid by the plan to each such alternate payee, or the manner in which such amount or percentage is to be determined.[7]
The Order must clearly specify the number of payments or period for which payments are required.[8]
The Order must clearly specify each plan to which the order applies.[9]
Under IRC §414(p)(3), the order must not contain certain provisions.
The order must not contain any provision that requires the plan to provide any type or form of benefit, or any option not otherwise provided under the plan.[10]
The order must not contain any provision that requires the plan to provide increased benefits (determined on the basis of actuarial value).[11]
The order must not contain any provision that requires payment of benefits to an alternate payee that are required to be paid to another alternate payee under a previous existing QDRO.[12]
IRC §414(p)(4)(A) provides that a domestic relations order will not be treated as failing to meet the requirements of 414(p)(3)(A) (which disqualify an order requiring a plan to provide a type or form of benefit, or option, not otherwise provided under the plan) solely because such order requires that payment be made to an alternate payee--
(i) before a participant has separated from service on or after the date on which the participant attains (or would have attained) the earliest retirement age,
(ii) as if the participant had retired on the date on which such payment is to begin under the order (but taking into account only the present value of the benefits actually accrued and not taking into account the present value of any employer subsidy for early retirement), and
(iii) in any form in which such benefits may be paid under the plan to the participant (other than in the form of a joint and survivor annuity with respect to the alternate payee and his or her spouse).
(For purposes of clause (ii), the interest rate assumption used in
determining the present value shall be the interest rate specified in the plan
or, if no rate is specified, 5%.)
§414(p)(4)(B) as amended by TRA '86, provides that the term earliest retirement age means the earlier of--
“(i) the date on which the participant is entitled to a distribution under the plan, or
“(ii) the later of
“(I) the date the participant attains age 50, or
“(II) the earliest date on which the participant could begin receiving benefits under the plan if the participant separated from service.”
It would appear that because of IRC §414(p)(3)(A), as modified by IRC §414(p)(4), a domestic relations order cannot require a plan to make a distribution to an alternate payee at a time earlier than the plan could make a distribution to the participant, unless the participant has reached the earliest retirement age under the plan. All pension plans and most profit sharing plans prohibit a distribution before the participant has reached normal retirement age or separated from service.[13]
In summary, it will generally be the rule that no domestic relations order will be valid as a QDRO if it requires a distribution before the participant has either:
(1) attained age 50, or
(2) separated from service,
unless the plan is a profit sharing plan that allows for in-service withdrawals on demand, after a specified number of years, in accordance with the principals of Rev. Rul. 68-24.
However, despite the foregoing, if the plan specifically provides for a distribution pursuant to an otherwise qualified domestic relations order, then the distribution can be made without violating the terms of the plan and this should cure the problem. Can a plan contain such a provision? See below.
The Conference Report to the bill states that a plan may provide for payments to the alternate payee prior to the participant's earliest retirement age. Conf. Rep. p. II-858. Exactly what was intended by this statement is not clear, but it may be that the Plan could be drafted so as to provide for a distribution to an alternate payee at any time. Consistent with the Conference Report, the final QDRO regulations indicate that the plan may specifically provide for payments to an alternate payee under a QDRO prior to the earliest retirement age.[14]
According to the Committee Reports, the plan will become disqualified if it makes a distribution under a domestic relations order that is not a QDRO.
Further, it is likely that the participant, rather than the payee spouse, will be taxed on the distribution to the payee spouse if the order is not a QDRO.[15]
Under IRC §414(p)(6)(B) all qualified plans are required to establish reasonable procedures to determine the qualified status of domestic relations orders and to administer distributions under such qualified orders. Most plans will have a statement that such procedures are to be established, but the procedures themselves will usually not be found in the Plan. Therefore, it will be necessary for such procedures to be adopted.
IRC §414(p)(6)(A) requires that the Plan Administrator give certain notices when a domestic relations order is received. Specifically, the Plan Administrator is to (1) promptly notify the participant and any other alternate payee of the receipt of a domestic relations order, (2) notify them of the Plan's procedures for determining the qualified status of domestic relations orders, and (3) within a reasonable period after receipt of the order, determine whether the order is a qualified domestic relations order and notify the participant and each alternate payee of such determination.
The Employee Benefits Handbook, Jeffrey Mamorsky, Editor, published by Warren, Gorham & Lamont, 1987, contains in Chapter 28 a good discussion of the legal requirements of a QDRO. The appendix to this chapter contains some suggested procedures to be adopted by a plan and two sample notification letters designed to comply with IRC §414(p)(6) and (7).
The QDRO should indicate whether or not the former spouse will be entitled to benefits at the participant's death. If the plan provides a forfeiture at death, the nonparticipant divorced spouse could be left with nothing. If the participant remarries, the new spouse could be entitled to the Qualified Preretirement Survivor Annuity (QPSA), unless the QDRO treats the former spouse as a surviving spouse of the participant for purposes of the Survivor Annuity rules. IRC §414(p)(5) specifically allows the QDRO to contain such a provision.[16]
(The QDRO should also indicate whether or not the beneficiaries of the alternate payee will be entitled to benefits in the event the alternate payee dies prior to the complete distribution of his or her interest.)
In William E. Dugan, et al. v. Lillian Clinton, et al., USDCt, N. Dist. Ill., Eastern Div, No. 86 C 8492, May 22, 1987, a QDRO left the nonparticipant spouse 25% of the participant spouse's benefit. The participant remarried and died prior to early retirement age. Apparently the only benefit payable on death was the QPSA, which belonged to the new spouse. Therefore, the new spouse got the QPSA and the prior spouse received nothing. The Dugan case is reported in CCH New Developments at ¶23,735, and is reported in PPD Current Developments at ¶323.09 (9/87). My reading of the new Treasury Regulations is that they are not consistent with the Dugan case. See Treas. Reg. §1.401(a)-13(g).
A QDRO ordinarily ought to provide that the alternate payee spouse will be treated as a surviving spouse, to the extent of his interest, for purposes of the QPSA.[17]
See the discussion by Congressman Clay of Missouri, in the Congressional Record of August 9, 1984, for four examples of how the survivor annuity rules will interact with a QDRO. These examples are reproduced in the CCH Pension Plan Guide at ¶2547I.
It is not permissible in a defined benefit plan to express the benefit to be paid under the QDRO as a single sum dollar amount, unless the plan gives the participant the absolute and unqualified right to receive his benefit in lump sum. Assuming, however, that the plan does give the participant this right, such a provision would be permitted.
This is probably true, even though fiduciary consent to a lump sum distribution election is required, although arguably, an order could fail if it directs the trustee to make a distribution in a form that the trustee, through the exercise of discretion, could not be forced to make. Since the regulations to §411(d)(6)[18] no longer permit trustee discretion as to the form of benefits, except in unusual situations, this problem may now be largely moot.
The Order may contemplate that a dollar figure will be set aside and accounted for separately. This is permissible.
§414(p)(7)(A) and (B), as amended by the 1986 Tax Reform Act, now provides:
"