Address QDRO Distribution Ambiguities From the Start
Distributing a benefit account in accordance with a qualified domestic relations order (QDRO) is one of the most difficult tasks a plan sponsor will face. These infrequent requests are oftentimes ambiguous, as they are part of a larger marital settlement agreement or domestic relations order, so reviewing and processing them requires special attention to detail and increased involvement from the plan sponsor. It is important to be familiar with how these settlements are reached, and the potential service providers that may be involved, to follow best practices to avoid common errors made in the processing stages of the distribution.
Most QDROs bring a unique set of challenges
A QDRO is a judgment, decree, or order that creates or recognizes an alternate payee's right to receive all or a portion of a plan participant's benefits payable under an ERISA-qualified employee benefit plan. QDROs generally arise from a marital settlement agreement (i.e., a divorce decree or other legal document). Plan sponsors should recognize and be mindful of the fact that, by nature, divorces are often contentious, and there is a good chance that the parties may later have remorse about the settlement reached or the terms and conditions affecting the ultimate disposition of the account.
Oftentimes, the parties’ legal counsel may not be well-versed in the issues surrounding distributions from qualified retirement plans, which results in preparation of ambiguous documents that may later be subject to scrutiny if assumptions had to be made to process the request. It is in these cases that the plan sponsor is often asked by the service providers to determine the amount of the distribution, as the service providers do not want to take on the liability should the distribution be incorrectly processed.
In other situations, a QDRO professional is brought in to formally analyze the order and prepare the paperwork for court approval. Such paperwork is circulated to both parties via their respective attorneys for approval and then filed with the court. Once the court approves the QDRO, paperwork is sent to the employer for review and signature. It then goes to the third party administrator (TPA) or record keeper, who will analyze the QDRO and prepare paperwork of the actual account division. The recipient’s spouse is then given the choice of how to receive the funds (e.g., a separate account at the current custodian, a rollover to a retirement account, or other options).
Address ambiguities up front
While it may sound like these distributions should be straight forward, there are some nuances that could lead to ambiguities, which make processing requests much trickier. As the approver of the request, you must consider what will happen if:
- The participant has an outstanding loan against the retirement account.
- The participant is not fully vested in the account balance (and who will who get the “benefit” of the post-marital years of service).
- The QDRO is ambiguous about the division (e.g., the percentage of the account is listed without an “as of” date, language is used such as “equal division” rather than specific percentages, investment income and gains and losses allocated to a balance identified as of a date prior to the actual date of distribution).
- The account has company stock, which may have option provisions to restrict non-employees (and terminated employees) from holding shares.
- There are asset classes with significant surrender charges triggered at the time of liquidation.
Resolve issues in the preparation process
Many of these nuances can be addressed while the QDRO is being prepared and circulated amongst the parties and their respective legal counsel; however, in many instances they are not considered until the QDRO distribution request has been submitted, resulting in additional cost and time delays in fulfilling the request.
Plan sponsors should consider the following best practices to help participants resolve these matters in a cost-effective and time-sensitive manner:
- Encourage participants to get a TPA or record keeper to review the QDRO draft for ambiguity before all parties sign off and it enters the court process.
- Review the QDRO for potential issues (vesting, loans, or unusual asset classes) and direct a QDRO professional’s attention to these areas.
- Ensure all correspondence is done in writing, and that process steps are documented and saved along with the ultimate disposition transaction so it may be referenced in the event that there is a later dispute.
- Manage expectations and help avoid misunderstandings and miscommunications by providing reasonable timelines for accomplishing the QDRO.
- Promote transparency by copying all parties (including legal teams) on communications, when possible.
- Require all parties (including their attorneys) to sign off on the QDRO instructions.
How we can help
CliftonLarsonAllen (CLA) is well-versed in employee benefit plans. We can help you address uncertainties as you handle QDRO distribution requests, and our professionals can help mitigate your organization’s risk should you receive a request that has not been prepared by a QDRO professional. With a little patience and proactive measures, these distributions can be successfully handled, reviewed, and approved by the plan sponsor with minimal exposure to the plan and those charged with its governance.