Tips on QDRO Requirements and Earliest Retirement Age

The Internal Revenue Code requires that the qualified retirement plan must provide that benefits under the plan cannot be assigned. The anti-assignment rule does not apply to benefits that are transferred pursuant to a Qualified Domestic Relations Order (QDRO). A QDRO is an order or instrument that assigns benefits from a retirement plan to a spouse, former spouse, or child of the person covered by the plan. How do you know if an order meets the requirements of a QDRO?

BASIC REQUIREMENTS OF QDROS

The 9 points listed below can be used as a checklist. If the order or instrument meets each of these requirements, it is a Qualified Domestic Relations Order.

1) There must be a judgment, decree, or order (including approval of a property settlement agreement) that is made pursuant to state domestic relations law.

2) The order must relate to providing either child support, alimony, or marital property rights to a spouse, former spouse, child or other dependent of the individual participating in the plan.

3) The order must include the name and last known mailing address of both the person covered by the plan and the spouse, former spouse, or child who is to receive the benefits.

4) The order must include the amount or percentage of the benefits to be paid to each spouse, former spouse, or child, or a manner to determine the amount or percentage.

5) The order must include the number of payments or time period to which it applies.

6) The order must specifically identify each plan to which it applies.

7) The order cannot require the retirement plan to provide any type of benefit or payment option that is not otherwise provided by the plan. (However, see the Early Retirement Rule, below.)

8) The order cannot increase benefits based on actuarial value.

9) The order cannot require the payment of benefits that have previously been assigned by a prior QDRO to a different spouse, former spouse, or child.

Although not required, it is a good idea to state in the QDRO that the recipient is an alternate payee (spouse, former spouse, or child) and shall receive a division of the retirement benefits according to the provisions of Internal Revenue Code Section 401(a) and 414(p).

EARLY RETIREMENT RULE

There is an important exception to the rule that a QDRO cannot require a plan to provide any type of benefit or payment option not otherwise provided by the plan (point 7, above). An order will qualify if it provides that payments begin on or after the “earliest retirement age” whether or not the plan participant has actually retired on that date. The “earliest retirement age” is the earlier of (1) the earliest date that benefits are payable under the plan to the participant and the later of (a) the date the participant attains age 50 or (b) the date on which the participant could receive a distribution from the plan if the participant separated from service from the employer sponsoring the plan.

EXAMPLES OF EARLY RETIREMENT AGE

Example 1: Most profit sharing plans (but not all) provide that benefits can be paid to a participant after he or she quits or otherwise terminates employment. Assume the plan specifies the retirement age to be 60 but a participant can receive benefits upon termination of employment. The earliest retirement age is the earlier of (1) age 60 or (2) the later of (a) age 50 or (b) the date the participant could receive benefits if terminated. Since (b) could be earlier than (a), the later date is age 50. Thus, the earliest retirement age is the earlier of (1) age 60 or (2) age 50 which, of course, is age 50. A former spouse can begin receiving benefits under the QDRO when the participant spouse reaches age 50.

Example 2: Assume a profit sharing plan specifies the retirement age to be age 65 and that terminated participants can receive benefits at age 59½. The earliest retirement age is the earlier of (1) age 65 or (2) age 59½, which, of course, is age 59½. Possible Solution: The plan could be amended to provide that, in the case of a QDRO, the recipient can begin receiving benefits at age 50 as in Example 1. If the employer sponsoring the plan is a closely-held business owned by the participant who is being divorced, it is relatively simple to amend the plan.

EARLIEST RETIREMENT AGE

According to the Senate Finance Committee report on the Tax Reform Act of 1986, a retirement plan itself may permit benefit payments to be made under a QDRO before the earliest retirement age. Thus, a plan could be amended to provide for immediate payments to the former spouse of the participant upon issuance of a QDRO. This could be a very useful option to provide support to a former spouse or child.