Plan Sponsors: You Should Have a Model QDRO
ERISA Section 206(d)(3)(G)(ii) requires sponsors of qualified retirement plans to maintain written procedures for the administration of qualified domestic relations orders (“QDROs”), and the plan administrator has an obligation to ensure that a domestic relations order received by the plan is “qualified” before making the payments or taking other actions contained in the order. While a plan sponsor is not required to maintain a model QDRO for its retirement plans, the development of a model QDRO can make QDRO administration more efficient and produce better results for both the affected participant and the alternate payee.
What Is a Model QDRO and Why Is It Helpful?
A model QDRO is a template domestic relations order designed to satisfy all of the statutory requirements of ERISA Section 206(d) and Internal Revenue Code Section 414(p). Once approved and signed by a state authority, typically a court, the document will constitute a valid QDRO. In addition, a model QDRO can and should be drafted to reflect the terms of the plans that the employer maintains. This will help avoid the time consuming, costly, and sometimes frustrating process of modifying an order to make sure that it does not require a form of distribution (or confer other rights) not allowed under the plan document.
A well-drafted model QDRO will:
- Support more efficient review. The model helps to ensure that the parties will get the basics right and this will expedite the approval process.
- Avoid unnecessary expense and frustration. By cutting down on the number of drafts that must be exchanged and minimizing confusion and delay, the plan and the participant will save money and preserve sanity.
Plan sponsors who are developing a model QDRO for the first time should consider the following:
- One Model or Two. You may need multiple models or a model with multiple choices. For example, if you maintain a defined contribution (“DC”) plan and a defined benefit (“DB”) plan, your model(s) will need to deal with the different structures of the plans. Under the DC plan each participant will have a separate account and a participant’s benefit is equal to the account balance. In the case of a DC plan, the participant’s account balance can simply be divided – using the “separate interest” method – in order to provide a benefit to the alternate payee. In contrast, under a DB plan a participant’s benefit is typically determined based on a formula and the plan does not maintain separate accounts for participants. Therefore, in the case of the DB plan, it’s important to remember that dividing the benefit is not as simple as splitting an account. Instead, the model must contemplate how to divide the participant’s “accrued benefit,” which may require a formula for calculating the marital portion of the benefit. In addition, once in pay status, a DB plan benefit cannot be recalculated; therefore, it may be necessary to maintain a second DB plan model to share the DB plan benefit payments – the “shared payment” method.
And, even the relatively simpler DC plan model QDRO could set forth multiple options for division: using a flat dollar amount or a percentage of the account, including or excluding earnings and losses between the date of division and the date assets are actually transferred to the separate account, or for including or excluding any outstanding loans in the value of the account. For all these reasons, employers who maintain both a DC plan and a DB plan are best served by adopting separate model QDROs that describe multiple benefit sharing options supported by the terms of the plan.
- Communications. We recommend developing a cover memo that describes the assumptions that were made in drafting the model(s) and includes proper legal disclaimers. A well drafted memo will tie together the terms of the plan, the QDRO procedures, and the model QDRO. The memo can be provided to the participant and alternate payee, or to their legal counsel, as part of the QDRO procedure.
- A Proposal, Not a Prescription. Finally, it is not necessary for the parties to use an employer’s model QDRO word-for-word. A model is intended to be a roadmap that will help the parties and the plan administrator reach the desired destination efficiently. Ultimately, it is the responsibility of the parties and their counsel, not the plan sponsor or plan administrator, to ensure that they understand the asset being divided and that their intent and best interests are reflected in the final product.