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A LEGAL PRIMER ON QDROs
 
January 26, 2006
 
QUESTION: I have a 401K pension plan and IRA at work. I am in arrears in child support.  May this money be taken?
 
ANSWER: Yes, if it comes under the provisions of a Qualified Domestic Relations Order under federal law. Pensions and other retirement benefits may be taken.
"The Employee Retirement Income Security Act of 1974" is commonly called ERISA.  The purpose of "ERISA" is to protect employee benefits. Click on the word "ERISA" for more details. Under an amendment to ERISA in 1985, insurance benefits can extend after work termination under "COBRA," and after divorce.  Another part of ERISA is "HIPPA." HIPAA,  allows employees to obtain continued coverage for preexisting medical conditions in some circumstances when they move from one plan to another, prohibits some forms of discrimination in health coverage based on factors that relate to an individual's health, and requires stringent privacy protections for certain types of health information. The part of ERISA that concerns us today are what are known as QDROS. QDROS are generally provided under 29 USCS 1056(d). 29 USCS 1056 (a)-(c), and (e) and (f) do not specifically relate to QDROs, so our focus is just on 29 USCS 1056(d).
FIRST THE GENERAL RULE: Under ERISA, 29 USCS 1056(d) (1), "Each pension plan shall provide that benefits provided under the plan may not be assigned or alienated."  Thus, your typical creditor cannot go after these monies. 
THE EXCEPTION FOR DOMESTIC RELATIONS: As expected, they make exceptions for fathers who are asked to pay alimony or child support. (As stated in a previous e-mail, child support is not exempt from bankruptcy, and the federal government allows for far greater percentages to be garnished by child support creditors as opposed to other creditors.) The statute then creates an exception, 29 USCS 1056(d) (3), " Paragraph (1) shall apply to the creation, assignment, or recognition of a right to any benefit payable with respect to a participant pursuant to a domestic relations order, except that paragraph (1) shall not apply if the order is determined to be a qualified domestic relations order." Thus the concept of a "QDRO" is created, pronounced "QUAD' row." Thus, under so long as the requirements of a QDRO are met, pension benefits may be taken by a your ex-wife or ex-husband in a domestic relations order, though all other creditors cannot.
What makes a "domestic relations order" "qualified"?  Though this part is long, it is not hard to meet the requirements.  The statute provides the answer 29 USCS 1056(d) (3)B-G:
(B) For purposes of this paragraph--
         (i) the term "qualified domestic relations order" means a domestic relations order--
(I) which creates or recognizes the existence of an alternate payee's right to, 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, and
(Rinaldo's Note: "Alternative payee" is lingo for the other person under the domestic relations order, most typically a mother, who is get the retirement benefits of another person, most typically the father. 29 USCS 1056(d) (3)(K) defines the term "alternate payee: " The term "alternate payee' means any spouse, former spouse, child, or other dependent of a participant who is recognized by a domestic relations order as having a right to receive all, or a portion of, the benefits payable under a plan with respect to such participant.")
(II) with respect to which the requirements of subparagraphs (C) and (D) are met, and
(ii) the term "domestic relations order" means any judgment, decree, or order (including approval of a property settlement agreement) which--
(I) relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of a participant, and
(II) is made pursuant to a State domestic relations law (including a community property law).
(C) A domestic relations order meets the requirements of this subparagraph only if such order clearly specifies--
(i) the name and the last known mailing address (if any) of the participant and the name and mailing address of each alternate payee covered by the order,
(ii) 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.
(iii) the number of payments or period to which such order applies, and
(iv) each plan to which such order applies.
(D) A domestic relations order meets the requirements of this subparagraph only if such order--
(Rinaldo's Note: Clause E adds clarity this clause.)
(i) does not require a plan to provide any type or form of benefit, or any option, not otherwise provided under the plan,
(Rinaldo's Notes: This seems straightforward, but keep in mind next section which regards early withdrawal. Many plans do not allow for early withdrawal, which is what the other spouse often wants.)
(ii) does not require the plan to provide increased benefits (determined on the basis of actuarial value), and
(iii) does not require the payment of benefits to an alternate payee which are required to be paid to another alternate payee under another order previously determined to be a qualified domestic relations order.
(E) (i) A domestic relations order shall not be treated as failing to meet the requirements of clause (i) of subparagraph (D) solely because such order requires that payment of benefits be made to an alternate payee--
(I) on or in the case of any payment before a participant has separated from service, after the date on which the participant attains (or would have attained) the earliest retirement age,
(Rinaldo's Notes: This appears to mean that QDROs can have pay off dates LATER than the orginal ERISA plan. "Earliest Retirement Age" is further defined below.)
(II) as if the participant had retired on the date on which such payment is to begin under such order (but taking into account only the present value of benefits actually accrued and not taking into account the present value of any employer subsidy for early retirement), and
(Rinaldo's Notes: This is a very complicated provision. Ordinarily, 401Ks and IRAs and the like cannot be tapped into until one hits a certain age.  Thus, it appears as if the one may have a court order "as if the participant had retired on the date on which such payment is to begin" minus, obviously, the interest or dividends that would have accrued if the monies stayed in place until retirement age. So even if the alternate payee is receiving the money early, which the original payee could not do, this does NOT, NOT, NOT mean that the the plan is being forced to "provide any type or form of benefit, or any option, not otherwise provided under the plan" in contravention of the earlier section, D. The next Section provides the interest rates.)
(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 subsequent spouse).
(Rinaldo's Notes: This appears to state that monies received may be "in any form in which such benefits may be paid."  The question then becomes, suppose PARTY A owes PARTY B a 401K under a QDRO. Can party A simply TRANSFER the 401K (or a part), thus avoiding early withdrawal charges, OR can the order require payment by LIQUIDATING the 401K and paying cash?  It would seem to me, and I would be happy to consider thoughts to the contrary, that given this provision and the previous provision, under a QDRO, Party A may be order to liquidate the 401K and pay Party B. This problem typically arises when PARTY A is to pay PARTY B "x amount of dollars" for child support/property division or the like.  Party B often wants money, not a 401K or IRA or some other ERISA plan.)
For purposes of subclause (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 percent.
         (ii) For purposes of this subparagraph, 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 the date of the participant attains age 50 or the earliest date on which the participant could begin receiving benefits under the plan if the participant separated from service.
(F) To the extent provided in any qualified domestic relations order--
(i) the former spouse of a participant shall be treated as a surviving spouse of such participant for purposes of section 205 [29 USCS 1055] (and any spouse of the participant shall not be treated as a spouse of the participant for such purposes), and
(ii) if married for at least 1 year, the surviving former spouse shall be treated as meeting the requirements of section 205(f) [29 USCS 1055(f)].
(Rinaldo's Notes: This section establishes that the former spouse can be treated as a surviving spouse as if the original beneficiary (usually the father) had died. Under 29 USCS 1055, ERISA plans have to provide survivor rights to spouses.)
(G) (i) In the case of any domestic relations order received by a plan--
(I) the plan administrator shall promptly notify the participant and each alternate payee of the receipt of such order and the plan's procedures for determining the qualified status of domestic relations orders, and
(II) within a reasonable period after receipt of such order, the plan administrator shall determine whether such order is a qualified domestic relations order and notify the participant and each alternate payee of such determination.
(ii) Each plan shall establish reasonable procedures to determine the qualified status of domestic relations orders and to administer distributions under such qualified orders. Such procedures--
(I) shall be in writing,
(II) shall provide for the notification of each person specified in a domestic relations order as entitled to payment of benefits under the plan (at the address included in the domestic relations order) of such procedures promptly upon receipt by the plan of the domestic relations order, and
(III) shall permit an alternate payee to designate a representative for receipt of copies of notices that are sent to the alternate payee with respect to a domestic relations order.
29 USCS 1056
The next sections provide that the plans administrator (i.e., the people in charge of the 401K or IRA or other investment, determine whether an order is a QDRO.) 9 USCS 1056(d) (3)(H):
(H) (i) During any period in which the issue of whether a domestic relations order is a qualified domestic relations order is being determined (by the plan administrator, by a court of competent jurisdiction, or otherwise), the plan administrator shall separately account for the amounts (hereinafter in this subparagraph referred to as the "segregated amounts") which would have been payable to the alternate payee during such period if the order had been determined to be a qualified domestic relations order.
(ii) If within the 18-month period described in clause (v) the order (or modification thereof) is determined to be a qualified domestic relations order, the plan administrator shall pay the segregated amounts (including any interest thereon) to the person or persons entitled thereto.

(iii) If within the 18-month period described in clause (v)--
            (I) it is determined that the order is not a qualified domestic relations order, or
            (II) the issue as to whether such order is a qualified domestic relations order is not resolved,
         then the plan administrator shall pay the segregated amounts (including any interest thereon) to the person or persons who would have been entitled to such amounts if there had been no order.
         (iv) Any determination that an order is a qualified domestic relations order which is made after the close of the 18-month period described in clause (v) shall be applied prospectively only.
         (v) For purposes of this subparagraph, the 18-month period described in this clause is the 18-month period beginning with the date on which the first payment would be required to be made under the domestic relations order.
 

The next section, 29 USCS 1056(d) (3)(I), indicates when the plan fiduciary has done its job:


(I) If a plan fiduciary acts in accordance with part 4 of this subtitle [29 USCS 1101 et seq.] in--
         (i) treating a domestic relations order as being (or not being) a qualified domestic relations order, or
         (ii) taking action under subparagraph (H),
      then the plan's obligation to the participant and each alternate payee shall be discharged to the extent of any payment made pursuant to such Act.

The next section, , 29 USCS 1056(d) (3)(J), provides that alternative payees are considered beneficiaries under the plan:

  (J) A person who is an alternate payee under a qualified domestic relations order shall be considered for purposes of any provision of this Act a beneficiary under the plan. Nothing in the preceding sentence shall permit a requirement under section 4001 [29 USCS 1301] of the payment of more than 1 premium with respect to a participant for any period.

(Rinaldo's Note: 29 USCS 1301 is itself a complex statute, but provides for regulation of participation and vesting.  This statute appears to state that payments may not be more periodic than originally planned.)

 

The next section, 29 USCS 1056(d) (3)(M), really hurts fathers by not limiting the amount of a pension plan or ERISA benefit that may be garnished.

(M) Payment of benefits by a pension plan in accordance with the applicable requirements of a qualified domestic relations order shall not be treated as garnishment for purposes of section 303(a) of the Consumer Credit Protection Act [15 USCS 1673(a)].
 

(RINALDO'S NOTES: Remember that part where I told you that child support creditors [i.e., the mother receiving child support] can actually garnish much more money of your paycheck than a regular creditor? Under 29 USCS 1056, regular creditors can only take 25% of disposable income, but child support creditors can take as much as 50%-65%?  Well, this mean even this measly protection is not in place.  Basically, your ex can take ALL, ALL, ALL of your pensions, IRAs, and other ERISA money; not just 65% of it) 

(N) In prescribing regulations under this paragraph, the Secretary shall consult with the Secretary of the Treasury.

FINALLY SECTION 3 of subsection d ends [29 USCS 1056(d) (3)], and we are on to section 4. [29 USCS 1056(d) (4). "29 USCS 1056(d)" is the only part of 29 USCS 1056 that deals with QDROs.]

1056(d) (4).


   (4) Paragraph (1) shall not apply to any offset of a participant's benefits provided under an employee pension benefit plan against an amount that the participant is ordered or required to pay to the plan if--

(Rinaldo's Notes: Paragraph 1 was the section that read: "Each pension plan shall provide that benefits provided under the plan may not be assigned or alienated." Thus, in the following circumstances, the property may not be alienated.  A further detailed review of this section is beyond the scope of this article. This would seem self-evident because I don't see how of the soon to be described events constitute "domestic relations orders," but those that drafted the statute wanted to be clear.)


      (A) the order or requirement to pay arises--
         (i) under a judgment of conviction for a crime involving such plan,
         (ii) under a civil judgment (including a consent order or decree) entered by a court in an action brought in connection with a violation (or alleged violation) of part 4 of this subtitle [29 USCS 1101 et seq.], or
         (iii) pursuant to a settlement agreement between the Secretary and the participant, or a settlement agreement between the Pension Benefit Guaranty Corporation and the participant, in connection with a violation (or alleged violation) of part 4 of this subtitle [29 USCS 1101 et seq.] by a fiduciary or any other person,

(Rinaldo's Notes: 29 USCS 1104 or "part 4 of this subtitle" concerns itself with breaches of fiduciary duty by the plans administrator.)

(B) the judgment, order, decree, or settlement agreement expressly provides for the offset of all or part of the amount ordered or required to be paid to the plan against the participant's benefits provided under the plan, and
      (C) in a case in which the survivor annuity requirements of section 205 [29 USCS 1055] apply with respect to distributions from the plan to the participant, if the participant has a spouse at the time at which the offset is to be made--
         (i) either--
            (I) such spouse has consented in writing to such offset and such consent is witnessed by a notary public or representative of the plan (or it is established to the satisfaction of a plan representative that such consent may not be obtained by reason of circumstances described in section 205(c)(2)(B) [29 USCS 1055(c)(2)(B)]), or
            (II) an election to waive the right of the spouse to a qualified joint and survivor annuity or a qualified preretirement survivor annuity is in effect in accordance with the requirements of section 205(c) [29 USCS 1055(c)],
         (ii) such spouse is ordered or required in such judgment, order, decree, or settlement to pay an amount to the plan in connection with a violation of part 4 of this subtitle [29 USCS 1101 et seq.], or
         (iii) in such judgment, order, decree, or settlement, such spouse retains the right to receive the survivor annuity under a qualified joint and survivor annuity provided pursuant to section 205(a)(1) [29 USCS 1055(a)(1)] and under a qualified preretirement survivor annuity provided pursuant to section 205(a)(2) [29 USCS 1055(a)(2)], determined in accordance with paragraph (5).
   A plan shall not be treated as failing to meet the requirements of section 205 [29 USCS 1055] solely by reason of an offset under this paragraph.

 29 USCS 1056(d) (5)(I)


   (5) (A) The survivor annuity described in paragraph (4)(C)(iii) shall be determined as if--
         (i) the participant terminated employment on the date of the offset,
         (ii) there was no offset,
         (iii) the plan permitted commencement of benefits only on or after normal retirement age,
         (iv) the plan provided only the minimum-required qualified joint and survivor annuity, and
         (v) the amount of the qualified preretirement survivor annuity under the plan is equal to the amount of the survivor annuity payable under the minimum-required qualified joint and survivor annuity.
      (B) For purposes of this paragraph, the term "minimum-required qualified joint and survivor annuity" means the qualified joint and survivor annuity which is the actuarial equivalent of the participant's accrued benefit (within the meaning of section 3(23) [29 USCS 1002(23)]) and under which the survivor annuity is 50 percent of the amount of the annuity which is payable during the joint lives of the participant and the spouse.

29 USCS 1056
 

Other sources of information:  Department of Labor