First, it is important to understand what a QDRO is. Bob Toth, an attorney based in Fort Wayne, Indiana, tells PLANSPONSOR, “A domestic relations order is sometimes merely referred to as a DRO, which is your run-of-the-mill divorce order or child support order.”
A DRO becomes ‘qualified,’ says Toth, once a plan administrator determines:
- It was issued by a court of competent jurisdiction in the state (the court clerk’s attestation clause is enough);
- It is actually a domestic relations order and not merely some civil lawsuit;
- Has the name and address of the plan participant and each alternate payee;
- Describes what is payable to the alternate payee, and the number of payments or period to which it applies;
- Includes the name of the plan to which it applies;
- Does not require a type or form of benefit not provided under the plan, i.e. a monthly payment when none is available under the terms of the plan; and
- Does not require payments to an alternate payee of amounts already due to an earlier alternate payee.
John Fellin, vice president of FASCore, the recordkeeping affiliate of Great-West Financial, tells PLANSPONSOR his firm looks at Internal Revenue Code (IRC) Section 414(p), the Employee Retirement Income Security Act (ERISA), and a plan’s requirements to determine if a domestic relations order (DRO) is qualified. The Denver-based Fellin cites The QDRO Answer Book, which describes a QDRO as a DRO that assigns to an alternate payee the right to receive all or a portion of the benefits payable to a participant under a qualified retirement plan and that meets certain other requirements, as per IRC Section 414(p)(1) and ERISA Section 206(d)(3)(B).
As for what QDRO-related errors recordkeepers or plan sponsors should keep an eye out for, Toth lists:
- Attempting to get the plan to pay attorney fees;
- Attempting to have taxes related to the alternate payee distribution paid from the participant’s account; and
- Failing to provide sufficient contact and Social Security information for the alternate payee.
Fellin says recordkeepers and plan sponsors should also pay special attention to:
- Properly preserving or restricting the alternate payee’s portion when notified of a DRO situation;
- Any provision that cannot be administered or conflicts with the terms of the plan; and
- Identifying same-sex couples' DROs for tax reporting purposes.
Fellin adds that recordkeepers and plan sponsors should also keep an eye out for orders that are based on a condition (e.g., dollar or percentage award contingent on the selling of a property) and are not able to be administered, as well as orders that are missing the appropriate court entry/filing stamp and approval.
“These mistakes are avoided by providing a draft to the plan administrator or providing to the attorney either a template or a checklist they would use in drafting the order, if the attorney contacts them first," Toth says. "They should also ask for a draft of the order before submitting it to the court. It’s a mess to try to correct an order, as it often requires reopening a case or an additional hearing. They are corrected by making sure the court has continuing jurisdiction, so that the parties can go into the judge without refiling. Some administrators might accept a stipulation of the parties.”
According to Fellin, “As a recordkeeper, Great-West Financial encourages the parties to submit a proposed order before filing with the court to ensure the plan and recordkeeper can comply once it is approved by the court. In addition, we rarely see mistakes or issues with plans that either require the use of their model order or provide a model order.”
Toth notes, “QDROs can be messy and time consuming, as they are done in often tense circumstances with attorneys who may not be well-versed in retirement law. The recordkeeper needs to keep its own interests in mind, and avoid being overly sympathetic toward one side—though it is often tempting to do so—and should remain even handed.”
More information about QDROs can be found on the Department of Labor's website.