1Can an attorney receive direct payment from a plan pursuant to a QDRO for a client’s attorney’s fee(s)?
No. Distributions pursuant to a QDRO may only be payable to an alternate payee (IRC §414(p)(1)(A)) and pursuant to IRC §414(p)(8), an alternate payee means any spouse, former spouse, child or other dependent of a participant who is recognized by a domestic relations order as having a right to receive all , or a portion of, the benefits payable under a plan with respect to such participant. Since an attorney does not meet the definition of an alternate payee, a plan will not make direct payment to an attorney.
2Can a QDRO be prepared before a divorce is finalized?
In many cases, we are engaged to prepare a QDRO after the divorce has been finalized. However, this can result in costly delays (both emotional and financial), and in extreme cases loss of benefits. We encourage attorneys to prepare or have the QDRO(s) prepared once a settlement has been reached, so that the document(s) can be signed and entered with the Divorce Decree or Settlement Agreement. It is generally much easier to get the participant’s signature on the QDRO and the Divorce Decree at the same time. After the Divorce Decree or Settlement Agreement has been finalized, many participants can be difficult to locate.
If the Divorce Decree is finalized without the completion of a QDRO, and the participant dies before a QDRO can be entered and accepted, an alternate payee’s awarded benefit may be forfeited or at the very least require further action to determine whether the alternate payee may receive his/her benefit.
3Can a QDRO force a plan to make a form of payment to an alternate payee that it would not otherwise provide?
No. According to IRC §414(p)(3)(A), a domestic relation order cannot require the plan to provide any type or form of benefit, or any option, not otherwise provided under the plan. In other words, A QDRO cannot state that an alternate payee will receive his or her distribution in the form of an immediate lump-sum distribution, if the plan does not already provide for this. This is also important to know when you are negotiating the division of retirement assets. It is not uncommon for us to receive a request to prepare a QDRO after the Divorce Decree is finalized, for a plan that may not be available for commencement until 10 or 15 years down the road. However, the client was not informed of this and in many cases, the attorney told the client he or she would receive it immediately.
4Can a plan administrator charge a fee to review a domestic relations order?
Yes. The Department of Labor has determined that a plan administrator may “assess reasonable expenses attributable to a QDRO determination” for a defined contribution plan and those expenses may be assessed against the participant’s account (see Field Assistance Bulletin 2003-3). The term “reasonable expenses” is not defined and we are seeing plan fees anywhere from $300 to $1,200 per Order.
5Do IRAs require a QDRO to be divided?
There does not seem to be a clear answer to this question. In most cases, the custodian only requires a certified copy of the Divorce Decree, which clearly identifies the IRA to be divided (i.e. name of the custodian and the account number), the award and the identity of the parties. In many cases, this, along with transfer forms provided by the custodian is sufficient to divide the IRA. In some cases, the custodian may request a letter of instruction, which is a letter that describes the assignment in more detail and is signed by both parties. However, in some cases, the custodian may request a QDRO. I would suggest a call to the account representative or custodian to determine what is required
6If an alternate payee takes a distribution from an ERISA qualified plan, does he or she have to pay a penalty?
According to Section 72(t)(2)(C) of the Internal Revenue Code “(IRC”), the answer is “No.” Many believe that if an alternate payee elects a distribution from an ERISA qualified plan prior to age 59 ½, that he or she is subject to income tax and penalty. However, under Section 72(t)(2)(C) of the IRC, any distribution to an alternate payee pursuant to a qualified domestic relations order (within the meaning of section 414(p)(1) of the IRC), shall not be subject the additional 10% tax. Please note that the alternate payee may be subject to regular income tax on the distribution. You are encouraged to consult with your account and/or financial representative for further explanation prior to make a distribution.
7Can an alternate payee receive immediate access to the account after the QDRO is completed?
It depends. Never assume that an alternate payee can receive immediate access to the funds. When it comes to defined contribution plans (i.e. 401(k) plans, Retirement Savings Plans, etc.) distributions can take place relatively quick once the plan’s administrator approves the QDRO. However, with some plans, distributions may only be available once a year during a specific period. For most traditional defined benefit plans, payment may commence at the employee’s earliest retirement eligibility or later. If timing of a distribution is a concern, be sure to confirm the distribution timing & options before the deal is finalized.
8How long does the QDRO process take?
This can depend on the circumstances of the case & the plan’s administrator. Often times the actual drafting is the quickest step in the process. However, once that has been completed the proposed QDRO will need to be reviewed & signed by the parties (depending on the states requirements) and then filed with the court. The judge will need to sign the proposed QDRO and the proposed QDRO will need to be sent to the plan’s administrator for review and final processing. Needless to say, this is not an overnight process. Don’t leave this process to the end, get started as soon as you know that a benefit will be divided.
9Is there a statute of limitation for QDROs?
The short answer is no. However, if you choose to delay in finalizing this matter you most likely will face additional challenges, up to and possibly including forfeiture of benefits. Nothing good can come from delaying this process. The more time that passes, the higher risk you assume, which can translate into more time & attorney fees. Once an employee leaves employment, a company closes or can no longer fund its financial obligations to the plan, the employee retires and commences his/her benefit, or if the employee dies, things can get very messy.
10Is it important to know the exact name of the plan that will be divided by QDRO?
Yes. Information is key in these cases. Many companies have multiple retirement plans. Unless your divorce decree is clear as to which plan is to be divided, questions can arise. Questions can cost you time & money. Be sure to acquire a plan statement or estimate for the plan(s) that is/are to be divided.