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| A
LEGAL PRIMER ON QDROs |
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| January 26, 2006 |
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QUESTION:
I have a 401K pension plan and IRA
at work. I am in arrears in child
support. May this money be taken? |
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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. |
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"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). |
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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. |
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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. |
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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: |
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(B) For purposes of this paragraph--
(i) the term
"qualified domestic relations order"
means a domestic relations order-- |
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(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 |
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(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.") |
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| (II) with respect to which the requirements
of subparagraphs (C)
and (D) are met, and |
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| (ii) the term "domestic relations
order" means any judgment, decree,
or order (including approval of a property
settlement agreement) which-- |
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| (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 |
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| (II) is made
pursuant to a State domestic relations
law (including a community property
law). |
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| (C) A domestic relations
order meets the requirements of this
subparagraph only if such order clearly
specifies-- |
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| (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, |
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| (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. |
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| (iii) the number of payments or period
to which such order applies, and |
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| (iv) each plan to which such order
applies. |
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| (D) A domestic relations
order meets the requirements of this
subparagraph only if such order-- |
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| (Rinaldo's Note: Clause E
adds clarity this clause.) |
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| (i) does
not require a plan to provide any type
or form of benefit, or any option, not
otherwise provided under the plan,
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| (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.) |
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| (ii) does
not require the plan to provide increased
benefits (determined on the basis
of actuarial value), and |
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| (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. |
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(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-- |
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(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, |
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(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.) |
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(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 |
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(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.) |
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(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). |
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(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.) |
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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-- |
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(I) the date
on which the participant is entitled
to a distribution under the plan,
or |
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(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. |
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| (F) To the extent provided in any
qualified domestic relations order-- |
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(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 |
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| (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)]. |
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(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.) |
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| (G) (i) In the case
of any domestic relations order received
by a plan-- |
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(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 |
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(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. |
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(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-- |
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| (I) shall be in writing, |
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(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 |
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(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. |
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| 29 USCS § 1056 |
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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): |
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(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. |
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(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. |
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(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 |
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