Is a QDRO Necessary?
There are two ways to read this question, the first being whether a QDRO is necessary for the account or interest that’s being divided. The second is whether a QDRO as a document separate from the agreement or divorce decree is necessary.
As to the first, always check with the plan administrator. Plans governed by ERISA will need a QDRO to be divided. Plans not governed by ERISA may not need one and may not be divisible by means other than direct payment from the participant to the former spouse. If you think this is something in your case, we can help you write a separate order, or a section of the agreement to make each person’s responsibility in such a case clear.
As to the second, the answer is a resounding “no” a QDRO as a separate document is not necessary per ERISA. However, a document that meets all of the requirements of a QDRO is necessary. So, this reasonably means that so long as all of the language required by ERISA and the plan is included in the judgment of divorce and/or agreement which is incorporated into the judgment of divorce, then no separate document is needed.
So this begs the question, why have the QDRO be a separate document?
First, there is the matter of the parties’ privacy. The agreement and/or judgment of divorce usually includes a lot of information not related to the retirement division such as other marital property division, child custody, child support, and/or alimony provisions. If all of the necessary information is included in the agreement or judgment of divorce, then all of the non-related information will be required to be shared with the retirement plan administrator.
Second, sometimes parties will agree to complicated asset off-setting schemes which are described in detail within the agreement. When the QDRO is a separate document, these details are omitted so that the retirement plan administrator sees only the information necessary to divide the retirement plan. The retirement plan administrator does not need, nor do they want, to know the reason behind the division. They just want to know what the division is they need to implement.
Third, plan administrators are generally not attorneys, or even paralegals. They have a checklist to make sure certain provisions are included. They then review any additional provisions to see if there is anything that contradicts the plan rules, adds a burden to the Plan that the Plan is not willing to accept, or otherwise is something to which the Plan does not agree. If such a provision is included, it will cause a rejection. When parties have complicated asset off-setting schemes, sometimes the detailed description of the reason behind the division can cause confusion for the plan administrator. If the division is not clearly stated, the plan administrator will reject the order.
If is for these main reasons that we prefer to have the QDRO as a separate document from the judgment of divorce and settlement agreement.
As an additional note, some plans require that the settlement agreement be submitted to the plan with the QDRO. The reason is to safeguard the plan from future litigation.
In these circumstances, we have learned that if the parties are merely adding information to the QDRO, the plan administrator usually has no concerns. For example, if the parties state in the agreement that the former spouse is entitled to 50% of the amount accrued during the marriage as it relates to a defined contribution account, and then the QDRO states the amount being transferred to the former spouse is $50,000, that should not cause any issues with the plan administrator.
However, if the agreement says that the former spouse’s share of a defined contribution account will not include earnings, gains, and losses from the valuation date to the date of distribution, and then the QDRO says that it will include earnings, gains, and losses, the plan administrator may reject the QDRO. We have come across these cases and the parties have in good faith changed their minds about something in the agreement and simply wish to change it in the QDRO. In such circumstances we include a footnote in the QDRO to acknowledge the discrepancy between the agreement and the QDRO. The footnote makes the plan administrator aware that the parties are knowingly deviating from the agreement so that the QDRO cannot be contested in the future on the grounds of making an award that differs from the parties’ agreement.
If the plan implements an order that differs from the agreement, and a party later files to vacate or amend the order, the plan may be the subject of litigation. Whether the litigation is successful is a different question, but still it would cause legal and administrative fees to defend and therefore is something the plan will want to avoid.
If considering the need in the future for a QDRO as a separate document, consider these points with your client. If you have a QDRO need, contact us at 240-396-4373 to schedule a consultation. We have attorneys who focus their practice on the division of retirement and preparation of QDROs who can help resolve these issues.
