As the old country song by Tammy Wynette demonstrates, what happens during a divorce can be tough to spell out. Divorce can be the source of great confusion for many, including employers. They have a number of actions to take related to employee benefits when an employee goes through a divorce. Employers need to be prepared to discuss with employees the splitting of retirement plans, what happens to health care coverage and dependent care accounts.
In this blog post, we’ll discuss what employers need to know about the splitting of retirement plans after an employee’s divorce. Also check out Part 2: Health Care Coverage and Part 3: Flexible Spending Accounts.
Splitting Retirement Benefits After a Divorce
Employees who must split retirement benefits after a divorce, whether from a defined benefit (DB) or defined contribution (DC) plan, need to figure out how to divide the benefits. Retirement benefits are divided using a Qualified Domestic Relations Order (QDRO). Retirement plans regulated by the Employee Retirement Income Security Act (ERISA) prohibit retirement benefits from being assigned to anyone other than the employee who earned them. In most cases, state law and community property provisions are preempted by ERISA. A QDRO is an exception to this rule. QDROs only apply to plans that are tax-qualified and covered by ERISA.
A Domestic Relations Order is not considered “Qualified” unless it has been approved by the retirement plan’s administrator and the court. The order must be qualified before the plan administrator can make payments to the employee’s ex-spouse.
The terms of the QDRO must agree with the terms of the plan. It is extremely important to follow ERISA QDRO rules; a violation could risk disqualification of the plan and a breach of the plan administrator’s fiduciary duties. The plan administrator determines if the QDRO is valid under ERISA and agrees with the terms of the plan. According to ERISA Section 206(d)(3)(C), a valid QDRO must specify:
- The name and last known mailing address of the employee and the alternate payee (ex-spouse) who should receive a portion of the benefits
- The specific dollar amount or percentage of the employee’s benefits to be paid by the plan to the ex-spouse, or the manner in which the amount or percentage is to be determined
- The duration or number of payments to which the order applies
- Each plan to which the order applies.
The plan administrator should:
- Develop a model QDRO form for each type of plan to provide to the employee’s and divorcing spouse’s attorneys
- Tell the employee to request that his/her attorney send him/her and the plan administrator a draft QDRO for review and approval before submission to the court
- Provide a copy of the plan’s QDRO procedures to the employee, the spouse, and the attorneys representing them, if any.
What should a plan sponsor consider when developing a model QDRO?
- Create a separate model for each type of plan or create one model with multiple choices. Employers that have both a DC and a DB plan must have a model dealing with both types of plans.
- Communication. Develop a cover memo that describes the assumptions that were made in drafting the model QDROs, including a legal disclaimer. The memo should tie the terms of the plan together with the QDRO procedures and the model.
How are payments divided in a DC or DB plan?
- DC plans typically use a separate interest QDRO. Here, the plan balance is split into two accounts before payments have begun. The ex-spouse’s share of the benefits is adjusted to his/her own life expectancy and provides the ex-spouse with his/her own separate interest in a lifetime annuity. The payments can be made in the form of an immediate lump sum payout, a future lump sum payment or periodic payments.
- DB plans can use a separate interest QDRO but also have the option of a shared payment or shared interest QDRO. In a shared interest QDRO, the ex-spouse shares a portion of the employee’s benefits when they go into pay status. The ex-spouse must wait until the employee/participant’s normal retirement age to collect his/her portion of the benefits, often made in the form of a monthly payment.
The plan administrator should keep in mind that it is still the responsibility of the employee/ex-spouse and their counsel to make sure they understand how the retirement benefits after a divorce are divided and to ensure their intent is reflected in the final QDRO.
Because a QDRO must meet the approval of both the plan administrator and the court ordering the divorce, the attorneys and the plan administrator should ideally work together to make sure the proposed domestic relations order fulfills the parties’ intent as well as the terms of the retirement plan. If the court-ordered domestic relations order does not agree with the terms of the plan, the order is not qualified, and needs to be formally amended by the court to agree with the terms of the plan.
Now that you’re up to speed on retirement benefits after a divorce, check out the related posts:
- D-I-V-O-R-C-E (Part 2) – Handling Health Care Benefits
- D-I-V-O-R-C-E (Part 3) – Managing Flexible Spending Accounts
Amanda Wilke, CEBS
Information/Research Specialist at the International Foundation
Written by International Foundation of Employee Benefit Plans staff. This does not constitute legal advice. Consult your plan professionals for legal advice.
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