As plan sponsor there may be a time when you are notified that an employee is getting divorced. This article will assist you in what you need to obtain from the employee, your timing requirements and how you determine if the court order documents are qualified.
Your first step is to determine if you have a written procedure regarding qualified domestic relations orders, either as part of your plan document and distribution policy or as a separate document. A qualified domestic relations order or “QDRO” is a court ordered document that specifies or assigns an alternate payee rights to receive all or a portion of the benefits payable to a retirement plan participant. You may or may not receive the domestic relations order upon hearing your employee is going through a divorce. If you haven’t received any paperwork your second step would be to request that document and put a “hold” on the participant’s accounts until receipt and determination of the order’s qualified status.
You as plan administrator are responsible for administering the plan’s QDRO procedures and determining if the DRO is qualified. Upon receipt of the document your next step is to notify the participant and alternate payee of that receipt and the plan’s procedures for determining its qualified status. You have timing requirements that must be met as part of the procedures. The determination period is typically stated as 18 months and begins on the first date (after receipt of the order) that the order would require payment to the alternate payee. This allows you time to notify the parties involved, determine the qualified status and separate the accounts before making any payments to the alternate payee.
To determine if the DRO is qualified, the order must contain certain information to meet the requirements of IRC 414(p). The order must state the name and last known mailing address of the participant and the alternate payee. It must state the name of the plan to which the order applies along with the dollar amount, percentage or method of determining the benefit to be assigned to the alternate payee and the timing and form of payment. It cannot require the plan to provide a benefit or payment option that normally is not provided by the plan or provide payment earlier than what is permitted by the plan. It cannot require a payment of more than the participant’s vested interest or payment of benefits previously assigned under a prior QDRO.
Once you’ve determined the order is qualified you can work with your third party administrator to have the account split and determine when a distribution will be made. The plan should treat the alternate payee as a plan beneficiary and provide a summary plan description, summary of any material modification and the plan’s summary annual report. The plan may adopt specific language to provide for payment to the alternate payee. If the plan does not include immediate payment, the Code requires the plan to pay benefits to an alternate payee when the participant reaches “earliest retirement age”. Earliest retirement age is the earlier of (1) the date the participant may receive a distribution under the plan or (2) the later of the date the participant reaches age 50 or the earliest date the participant could begin receiving benefits following separation of service.
There are many aspects of domestic relation orders that could provide a misstep, which is why it is recommended that you have written procedures regarding QDROs. You wouldn’t want to jeopardize the plan’s qualified status by incorrectly administering these provisions. Always notify your Blue Ridge ESOP Associates' administrator as soon as you know an employee is going through a divorce and a domestic relations order has been received. Upon request we can provide services for determining the qualified status of the DRO, notifying the parties involved and processing payment of the benefit.