By James M. Steinberg, Esq

A practical aspect of employee benefits and matrimonial law involves the attorneys representing an ERISA Qualified Defined Contribution Plan, the plan’s participant and an alternate payee in the preparation and submission of domestic relations order ("DRO") to the plan’s administrator for the purpose of distributing a portion of the participant’s account to the alternate payee. This article attempts to clarify several of the issues presented to attorneys who prepare and present DROs to ERISA plan administrators.

To begin with, a defined contribution plan is a plan "which provides an individual account for each participant and for benefits based solely on the amount contributed to the participant’s account, and any income, expenses, gains and losses and any forfeitures of accounts of other participants which may be allocated to such participant’s account." In other words, while under a defined benefit plan, such as a pension, the amount of the benefit is payable pursuant to a formula used when the participant attains the normal retirement age, under a defined contribution plan, such as an individual annuity account, the benefit which the participant is entitled to is his or her account balance (including contributions and investment performance).

With this brief background of the type of plan discussed herein, let us focus on preparing the necessary domestic relations order. The initial order prepared and executed by a judge recognizing an alternate payee’s right to a pre-determined amount of the participant’s individual account is called a domestic relations order or DRO. The DRO is any judgment, decree or order relating to child support, alimony, or the marital rights of a participant’s spouse, former spouse or child. The purpose of the DRO is to assign an alternate payee (ie a former spouse or a child) the right to receive all or a portion of the benefits payable to a participant under an ERISA Qualified Defined Contribution Plan. However, if the DRO does not meet the seven requirements of a Qualified Domestic Relations Order ("QDRO"), then ERISA’s anti-alienation rule prohibits the participant’s defined contribution plan benefits from being assigned to the alternate payee. The determination that the DRO does not meet the QDRO requirements and therefore, violates ERISA’s anti-alienation provision is solely the responsibility of the plan administrator.

A brief explanation of ERISA’s anti-alienation provision is helpful in understanding the QDRO procedure explained herein. Under ERISA, a qualified retirement plan, such as a defined contribution plan, is not allowed to alienate any of a participant’s interest in the plan. What this means is that the amount of money in the plan attributable to the participant is protected from the outside interests of parties such as creditors and cannot be attached. However, one exception Congress carved out of this "anti-alienation" provision involves the interests of a spouse, former spouse or child. In these cases, Congress legislated that a portion of the participant’s interest in the plan could be alienated if a DRO met the requirements necessary to be a QDRO.

An attorney preparing a DRO must therefore follow very specific rules. However, due to the intricate nature of the ERISA statute and the QDRO requirements, QDROs are often not properly prepared and this results in delays in the alternate payee receiving his or her distribution. As a matter of practice, a DRO is only determined to be a QDRO if: the order is certified; is a judgment, decree, or order (including approval of a property settlement agreement) issued by a court and relating to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child or other dependent of a participant; specifies the name and full mailing address of the participant and the alternate payee; explicitly names the retirement plan affected; distribution made pursuant to the DRO would not increase the participant's benefits and would not change the terms of the Plan; explicitly states the amount or percentage of the participant's vested benefit to be paid to the alternate payee and specifies the manner in which such amount is to be determined; and specifies the time when payments to the alternate payee are to begin and the time until which they are to continue.

These requirements however are often confusing to the attorney unfamiliar with ERISA. Therefore, it is more important for the attorney to focus upon preparing the necessary order which will not only be signed by a judge but also determined to be a QDRO by the plan administrator. The proper DRO should provide a brief synopsis of its purpose (ie "to assign certain benefits of the plan to an alternate payee") and then, in most instances, the following information:

1. the name, address and social security number of the participant and alternate payee;

2. the name of the defined contribution plan involved;

3. the dates that the participant and alternate payee were married and if applicable, divorced;

4. an explanation of the alternate payee’s interest in the plan (ie "the alternate payee shall be entitled to receive the sum of [insert dollar amount] from the participant’s interest in the defined contribution plan. Said sum shall be paid to alternate payee by an immediate lump sum distribution to be made as soon as practicable after the plan administrator makes a final determination that the order is a Qualified Domestic Relations Order meeting the requirements of Sections 1056(d) (3)(C) and (D) of ERISA. The remaining account balance shall remain the sole and exclusive property of the participant");

5. that the participant shall cause a copy of the order to be served on the plan administrator forthwith and that the order shall remain in effect until further order of the presiding court;

6. that nothing contained in the order shall be construed to require the plan or plan administrator to provide to the alternate payee any type or form of benefit or any option not otherwise available to the participant under the plan;

7. that in the event the plan administrator does not approve the form of the order, then each party shall cooperate and do all things reasonably necessary to devise a form of order acceptable to the plan administrator; and

8. that the presiding court retains jurisdiction to enforce, revise, modify or amend the order insofar as necessary to establish or maintain its qualifications as a QDRO or to amend the order for other reasons, provided, however, neither the order nor any subsequent revision, modification, or amendment shall require the plan to provide any amount of benefits not otherwise provided by the plan.

By applying the aforementioned information into the proposed QDRO, such form provides the alternate payee with an immediate lump sum distribution from the participant’s individual annuity account. This form benefits the alternate payee because he or she can use the distribution immediately to pay personal expenses or the distribution can be transferred into an individual retirement account for future use.

While preparing a QDRO in and of itself is a unique experience, other practical issues arise which the attorney preparing a QDRO should be aware of. Perhaps the greatest concern of the participant or alternate payee is the tax implications which result after a distribution is made pursuant to a QDRO. If the QDRO provides for an immediate lump sum distribution to a spouse or former spouse as alternate payee, the distribution is subject to the 20% mandatory income tax withholding and an income resulting event for the alternate payee which shall cause a Tax Form 1099 to be issued at the end of the year. However, if the alternate payee rolls over the distribution into an individual retirement account or other qualified retirement plan, the mandatory withholding rules do not apply and the alternate payee does not have gross taxable income. In the event that the QDRO provides for a distribution relating to child support, the distribution is included in the gross taxable income of the participant and not the alternate payee. The alternate payee however, will still receive from the defined contribution plan a Tax Form 1099 stating the gross taxable amount of the distribution.

This article has attempted to provide the attorney unfamiliar with ERISA and its QDRO requirements with a brief synopsis regarding one type of plan and the type of QDRO used to effectuate a distribution on behalf of an alternate payee. Obviously, there are several types of qualified retirement plans which may effect the type of QDRO required. Therefore, it is best to contact the plan administrator and request the plan’s rules and procedures for preparing a QDRO, along with any possible sample form QDRO the plan recommends be used. With this information and the issues and procedures discussed above, the proper domestic relations order can be prepared without much confusion.