Major Differences in ERISA Governed Plans, and Non-ERISA Governed Plans

The Employees’ Retirement Income Security Act (ERISA), as revised, includes many protections for former spouses (or soon-to-be former spouses) as it relates to the submission of QDROs. Chief among them is that once a plan is on notice of a former spouse’s viable claim to the participant’s interest in the plan, the plan has a responsibility to protect that former spouse’s interest through the submission of a court-executed QDRO or the expiration of 18 months, whichever first occurs.

What are these protections?

For a defined contribution account the plan will usually prevent the participant from taking loans or making withdrawals from the account. For defined benefit accounts the plan can go as far as preventing the participant from commencing benefits or pausing benefit payments altogether, or can begin to withhold a portion for the former spouse pending the final order. For financially dependent spouses, the submission of a draft order for the purpose of implementing these protections can be a tactic to preserve the marital estate while the divorce is pending.

What is a viable claim from a former spouse?

ERISA does not clearly define what needs to be submitted to a plan for these protections to be put in place. Most ERISA-governed plans are very cautious and will put up protections when they receive a draft DRO.

Non-ERISA governed plans, however, only have such regulations if they are specifically written into their plan rules. Non-ERISA governed plans can protect their participants much more strongly. Imagine this scenario: a draft QDRO is submitted to the plan to ensure it will be accepted by the plan once in final form. The plan takes a while to review, but then responds with a few small edits.

The former spouse makes the edits and submits the draft for a second review. The plan again takes a while to complete the review. During that time the participant retires and commences benefits. The plan then responds to the former spouse’s second draft with substantial changes due to the participant’s retirement changing the benefits being available to the former spouse. Now the former spouse has to scramble to get the QDRO entered and to chase the participant for their share of the benefits that have been paid to the participant.

Alternatively, some non-ERISA governed plans have voluntarily put stricter protections in place for more day-to-day type activities. Specifically, the Thrift Savings Plan (federal government employees and military) requires spousal consent for any withdrawal or loan. While this is great to protect the marital asset, for a person who otherwise needs access to the funds for say, paying an attorney’s retainer fee, it may be a way for the former spouse to block the participant’s access to funds in a time of need. Recently, Congress has considered adding similar protections to ERISA, though no final decision has been made.

Why would these restrictions not be in the existing draft of ERISA?

Perhaps because the title of the statute is the Employees’ Retirement Income Security Act – as some courts have noted, the intent is to protect the asset of the employee, not their beneficiary. However, the protections exist once the former spouse’s claim is raised perhaps because the statute recognizes the need to transfer retirement funds to a more financially dependent spouse. After all, the need for QDROs and QDRO protections arose as divorce became more acceptable and there was one party with substantial retirement assets from employment and the other party had little to no retirement due to being a fulltime homemaker. As a former spouse has a marital claim to the retirement asset, they have a different standing from any other beneficiary.

As attorneys, what can we do to best protect our clients?

Gather information about the plan as early as possible. Figure out what are the plan’s procedures and how quickly they review and implement QDROs. If there is any concern regarding depletion of assets ask the plan what is required to freeze the account. Get the QDROs drafted in advance of a divorce. If there is no freeze on the account from any action prior to the divorce, then upon divorce the plan is unaware of any claim from the former spouse and will allow the participant to make any decision allowed under the plan rules. Not only does this protect the former spouse as best as possible, but it also gets the transfer done as close to the divorce as possible. It allows the parties to move forward from the divorce without the need to go back and get this done later, and as unattached as possible.

Have additional questions?  Contact our office at 240-396-4373.