Commonly Overlooked Compliance Problems: Retirement Plan QDROs
For many Americans, retirement savings represent one of their most significant assets. For this reason, whether and how to divide an individual’s interest in a retirement plan are often important considerations in divorce proceedings. While the division of marital property generally is governed by state law, any division of retirement benefits must also comply with Federal law, namely the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Internal Revenue Code (the “Code”). Specifically, the Department of Labor and the IRS have set forth specific requirements that must be met before retirement plans may be divided in a divorce proceeding. These requirements make up the “qualified domestic relations order” or “QDRO” rules. Unless a court’s order constitutes a QDRO and satisfies all the requirements of the Code and ERISA, an individual’s retirement benefits cannot be shared with anyone other than the participant. This typically requires parties to obtain a separate order from the court; divorce decrees, standing alone, rarely satisfy the QDRO requirements.
Federal law requires retirement plan sponsors to maintain QDRO procedures that:
- Are reasonable;
- Are in writing;
- Provide notice to the parties when a proposed QDRO is received; and
- Permit the alternate payee (e.g., former spouse) to designate a representative.
With the rising prevalence of divorce, it is essential plan that administrators establish and maintain QDRO policies and procedures.
Fiduciary duties. The plan administrator has a fiduciary duty to make sure that orders are properly processed. If a valid QDRO is not honored, or if an invalid order is honored, the plan administrator could face liability in connection with the faulty determination. Furthermore, where a plan’s service providers are administering a plan’s QDROs, the plan administrator should ensure its providers are following adequate procedures and complying with the requirements listed above.
QDRO fees. Service providers often charge significant QDRO review and processing fees. We regularly see fees up to $1,800 per QDRO. Plan sponsors should consider whether there is a more cost-effective approach available. Furthermore, QDRO fees should be regularly reviewed. Remember, plan sponsors have a fiduciary duty to ensure that all plan fees are reasonable.
McGrath North can assist you in reviewing, processing and approving QDROs at a fraction of the cost. We can provide you with custom-tailored QDRO procedures, internal checklists and model QDROs to facilitate QDRO preparation and review. Please contact your McGrath North attorney if you have any questions or would like us to help you develop a compliant QDRO process or one that better serves your participants.