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Drafting the Division of Retirement Plan Assets into a Divorce Decree - Qualified Domestic Relations Orders
by Steve Leventhal

Almost every divorce has retirement plan assets to be divided between the parties. These assets may be held in a 401(k), profit-sharing, defined benefit pension plan, money purchase pension plan, 403(b)-plan, or Individual Retirement Account or Individual Retirement Annuity. It is essential to protecting each client's interest in the divorce that the attorneys - especially the attorney for the non-participant spouse - have a thorough understanding of the retirement plan(s) in question as they negotiate a division of benefits. Nothing - well perhaps some things as we will see below - can be potentially worse that blindly dividing a retirement benefit and simply inserting that division into a divorce decree.

I had 20 years of pension experience when I set up my private law practice in Oregon in 2002 and began advising attorneys on the division of retirement benefits in divorce and drafting Qualified Domestic Relations Orders (QDROs) and the government equivalents. What I quickly learned was how many truly competent divorce attorneys did not understand the QDRO process and also how important it was for even experienced benefits attorneys like myself to follow this process with a clear attention to detail. This article will highlight some of the more prominent traps I have seen in my QDRO practice.

STATUTORY BACKGROUND

Under ERISA, qualified retirement plans - such as traditional pension, profit-sharing, money purchase, and 401(k) plans - must specifically contain a spendthrift provision that provides that benefits in the plan can not be assigned or alienated. IRC Sec. 401(a)(13), as added by the Employee Retirement Income Security Act of 1974 (ERISA). An exception to this rule is a distribution pursuant to a Qualified Domestic Relations Order as defined in IRC Sec. 414(p). A distribution from a single participant non-ERISA 403(b)-plan (tax-sheltered annuity) pursuant to a domestic relations order is treated in the same manner as a qualified retirement plan under IRC Sec. 401(a)(13). See IRC Sec. 414(p)(9) and (10). A 403(b)-plan that is subject to ERISA Title I is covered by both the IRC and ERISA Sec. 206(d).

Prior to 1984 there were a number of court cases regarding IRC Sec. 401(a)(13) and ERISA Sec. 206(d), and state court-ordered decrees that required payments from an employee's pension plan of alimony and child support obligations. The drift of the cases was that ERISA was not intended to pre-empt state domestic relations laws permitting the attachment of vested benefits for the purpose of meeting those obligations. See, e.g., AT&T v. Merry, 592 F.2d 118 (CA-2 1979).

Similarly, the IRS had issued rulings up to that time which held that the spendthrift provisions of IRC Sec. 401(a)(13) were not violated when a plan trustee complied with a court order that required a distribution of benefits of a plan participant in pay status to the participant's spouse or children to meet the participant's alimony or child support payments. However, the IRS also held in that same ruling that accrued benefits that are not currently payable to the participant under the plan's terms could not be attached since the participant had no present right to the benefits. IRS Rev. Rul. 80-27, 1980-1 CB 85.

This was a deal breaker because many plan participants involved in a divorce are not in pay status; i.e., they are not either currently receiving a benefit or they are not entitled to receive a benefit at this point in time.

The Retirement Equity Act of 1984 did three things regarding the spendthrift provisions under qualified retirement plans:

1. Created an entirely new set of rules for the treatment of certain domestic relations orders under IRC Sec. 414(p) and ERISA Sec. 206(d).

2. Provided a set of procedures for plan administrators to follow with respect to domestic relations orders.

3. Provided that the broad federal pre-emption provisions of ERISA do not apply to domestic relations orders and therefore the enforcement of state domestic relations orders was allowed.

A Domestic Relations Order under IRC Sec. 414(p) is a judgment, decree or order (including approval of a property settlement agreement) made pursuant to a state's domestic relations or community property law and relating to the provision of child support, alimony or marital property rights to a spouse, former spouse, child or other dependent of a plan participant.

IRS Sec. 414(p)(1)(B) and ERISA Sec. 206(d)(3)(B)(ii). The Domestic Relations Order becomes "Qualified" when it is later formally approved by the plan administrator.
IRC Sec. 401(a)(13) and 414(p) and ERISA Sec. 206(d) provide the rules for defining a domestic relations order and stating what may or may not be acceptable language for such an Order. ERISA Sec. 206(d) additionally provides rules for an ERISA plan administrator to follow in determining the "qualified" status of a domestic relations order.

ROLE AND TRAPS FOR THE ATTORNEY

The real issue for divorce attorneys is making certain that the language they include in a divorce decree and a QDRO protects their client. For all practical purposes, IRC Secs. 401(a)(13) and 414(p) and ERISA Sec. 206(d) mean very little to the attorney who is attempting to negotiate a favorable division of a retirement asset for his client.

The problem, however, is that most divorce attorneys - and this is not about competency as a divorce attorney - do not know the intricacies of retirement benefits law, do not understand retirement plan language and how it impacts on the ultimate benefit to be received by a plan participant or Alternate Payee, almost never even read the plan or plan procedures, don't know what a vesting schedule means and how it might impact on a division of benefits, have no idea how plan loans reduce an existing account balance, and then get caught in one of the worst traps of all - using a plan administrator's model QDRO to protect the interest of his client.

This area is so complex that even seasoned benefit attorneys, such as myself, approach each case with caution and detail. Let me address some of the problems I have seen in my QDRO practice and what I recommend as a way to avoid the pitfalls.

NEVER EVER USE A PLAN ADMINISTRATOR'S MODEL QDRO

Many plan administrators will tell the divorce attorney to use their model QDRO. This should never be done. Everything the plan administrator needs is in their model language. What your clients need is something else and much more extensive, and the QDRO must be tailor-made for the client.

Under ERISA Title I, the plan administrator's obligation is to comply with its statutory obligation under federal pension law. Beyond that obligation, there is no statutory responsibility to either party in the divorce. While some of the model language will benefit the parties, a model QDRO is not drafted with the interests of either the plan participant or Alternate Payee in mind. A model QDRO is simply not drafted to protect the client - whether the plan participant or Alternate Payee - the way the client has been protected by their divorce attorney throughout the divorce process.

A model QDRO should be reviewed to make certain that the plan administrator's requirements are met and then they should be incorporated into a “real” QDRO along with those clauses that actually protect the client.

Most model QDRO language is developed for defined benefit pension plans. This is more likely where these pension plans are union negotiated. These model QDROs generally do not have language creating a "separate interest" approach (whereby the Alternate Payee's benefits are separated from the Plan Participant) or "share interest" approach (whereby the Alternate Payee is still tied to the coat-tails of the Plan Participant) under a defined benefit pension plan. The parties have to decide which approach is best for their clients and this should be decided in advance of the signed judgment.

This decision is critical and, if appropriate language is omitted by the attorney, this can be devastating to a client's interest. In addition, most model QDROs do not include language regarding benefits at early retirement or early retirement subsidies, cost-of-living adjustments or other changes in benefits, the method of dividing benefits, protection to the Alternate Payee from a manipulative plan participant-spouse, protection in the event of death, beneficiary designations, and other protective clauses.

Verbatim acceptance of a model QDRO will not protect your client. A QDRO must be drafted and tailored to your client's needs. The best approach is to bring the QDRO attorney into the process while the division of property is being negotiated. This will make certain that the parties' wishes regarding the division of retirement plan assets can ultimately be achieved.

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"Steve has been a great technical resource for my firm over the years. We rely on the books that he has authored as our bible for many technical issues, including the 403(b) plan rules. Steve's experience and understanding of the laws and regulations have been extremely valuable."

-- Gwen O'Connell, Certified Pension Consultant (CPC) and Qualified Pension Administrator (QPA); Principal of Gwen O'Connell Pension Consulting, Inc., in Eugene, OR; and Executive Committee Member, a Vice President and a member of the Board of Directors of the American Society of Pension Actuaries (ASPA), and the General Chair for ASPA's Education and Examination Committee. (Eugene, Oregon)