Good News for the Lower Earning Spouse
There is good news for the lower-earning spouse who is worried about receiving her share of the 401k or pension. Thanks to ERISA, special rules exist and eliminate an ex-spouse from standing in the way of receipt. The use of the qualified domestic relations order (QDRO) is based on federal law under ERISA (Employee Retirement Income Security Act) which gives guidance on protecting the “alternate payee.” That is YOU if you are the non-employee.
ERISA Protection of the Former Spouse
There are three provisions to protect spouses under ERISA.
- The plan must offer a joint and survivor annuity to the spouse. This may be waived in writing by the spouse. However, the divorce does away with a “joint and survivor” annuity. This protection is pre-divorce.
- The plan must also offer a Qualified Pre-retirement Survivor Annuity to pay the surviving spouse an annuity if the employee dies before retiring.
- Once the couple is divorced, the plan must allow the non-participant spouse to be an Alternate Payee, qualifying for benefits under the plan either as a survivor or Alternate Payee (Qualified Pre-retirement Survivor Annuity or Joint and Survivor Annuity).
ERISA Provisions Prevail
ERISA provisions “supersede any and all State laws insofar as they may now or hereafter relate to any Employer Benefit Plan…” (29 U.S.C. Section 1144(a). This includes any laws, rulings, or decisions made by State courts. ERISA requires that a plan provide four documents that are extremely useful in checking a QDRO. They are:
- The text of the plan
- Summary Plan Description
- The Plan’s written QDRO procedures
- Annual benefit statement
While you don’t want to wade through the “text” of the plan, the Summary Plan Description provides the most important features of the plan document in easier-to-understand language. It contains an accurate and comprehensive description of the rights and duties of beneficiaries and participants. Read the section outlining rules for QDROs, divorce and survivorship.
The written QDRO procedures are the most important reading matter for guidance on the proper drafting of the document, along with a sample QDRO from the company. To secure the QDRO procedures, a phone call to the Plan Administrator should suffice. The plan procedures will include a complete checklist of plan requirements for approving a QDRO, and the steps necessary for expedience.
The annual benefit statement provides year-end projected or actual benefits to the employee. If the plan is a defined contribution plan, an actual value is given. For the defined benefit plan (pension plan) the statement gives the amount of the lump sum or monthly amount expected at retirement.
For a defined benefit plan, the pension estimate will include assumptions for future continued employment and raises. The increase in benefit value following the divorce is not part of the divorce estate, thus figures in this statement will not be the current value unless the participant is very near retirement.
Post-divorce Allocation of Earnings, Appreciation and Contributions
For the 401k plan (defined contribution plan), the QDRO should include detailed instructions for the allocation of future earnings, appreciation and contributions to the Participant’s plan. If the fractional share going to the Alternate Payee is established through the QDRO, her share should also experience appreciation, although future contributions will not be included.
Duties of the Plan
There are two primary duties of a plan governed by ERISA:
First they must “promptly” notify the parties that the QDRO has been received and determine whether it is qualified within a reasonable period of time. They must then notify the participant and Alternate Payee of the qualified or non-qualified status.
The second primary duty is to “separately account for the amounts that would be payable to an Alternate Payee” during the period in which the status of a QDRO is being determined. If you wish to start the 18-month segregation period earlier, get your attorney to submit a preliminary draft of a QDRO. Any receipt by the plan of a QDRO, no matter how flawed, serves to start the 18-month escrow provision to prevent the Participant from withdrawing funds.
Whereas with Non-qualified plans like deferred compensation plans or restricted stock, the employee spouse becomes “constructive trustee” and sends you your share of the plan; thanks to the QDRO and ERISA the company will step in and provide your share. Just be sure to carefully review the QDRO. See the article entitled QDRO Review to Avoid Costly Errors.