The Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) issued interim final regulations that clarify the status of domestic relations orders affecting qualified retirement plan benefits under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (the Code). The regulations were issued pursuant to a directive contained in the Pension Protection Act of 2006 (PPA).
Separately, the Pension Benefit Guaranty Corporation (PBGC) has updated its comprehensive booklet on how it administers qualified domestic relations orders in the context of terminated plans for which the PBGC pays benefits.
Together, these materials provide helpful information to plan administrators, service providers, participants and alternate payees who need to address compliance-related matters for these orders.
The DOL regulations, which are effective April 6, 2007, provide helpful guidance in the form of specific examples that demonstrate how to determine whether a domestic relations order (DRO) can become a qualified domestic relations order (QDRO) under special circumstances anticipated by the PPA. The DOL has invited comments (to be submitted no later than May 7, 2007) as to whether, and to what extent, there are additional factual scenarios that should be added to the examples already in the interim final rule.
The factual scenarios used in the regulations have been the subject of controversy in the past. Often plan administrators were not sure of the status of certain orders (for example, orders issued after the participant’s death), and courts deciding these matters have issued conflicting opinions. Although many retirement plan administrators may already have QDRO procedures that anticipate the factual scenarios included in the regulation, a few of the provisions may result in the qualification of certain DROs that plan administrators would not have qualified in the past.
Timing and Order of Issuance
Subsequent Domestic Relations Orders
Under the DOL guidance, a DRO that otherwise satisfies the requirements to be a QDRO will not fail to be treated as a QDRO solely because the order is issued after, or revises, another DRO or QDRO.
- Example 1—Subsequent DROs between the sameparties: A subsequent DRO between a participant and a former spouse may be a QDRO even if it reduces the benefits that were awarded to the former spouse under the initial QDRO.
- Example 2—Subsequent DROs between differentparties: A subsequent DRO between a participant and a former spouse #2 may be a QDRO only if the benefits assigned to the former spouse #2 under the subsequent QDRO were not already assigned to the former spouse #1 under the first QDRO.
- Separate accounting required for certain subsequent DROs: Under ERISA and the Code, plan administrators must separately account for amounts covered by a DRO during the time that the administrator is reviewing the DRO for compliance. Suppose that a DRO under which a spouse would begin receiving benefits immediately is not determined to be a QDRO. The plan administrator may then receive a second DRO relating to the same parties after the 18-month maximum segregation period. Notwithstanding the expiration of the first 18-month period, the amounts covered by the second DRO must be separately accounted for by the plan administrator for another 18-month segregation period.
Timing of a Domestic Relations Order
A second rule under the DOL guidance is that a DRO that otherwise satisfies the QDRO requirements will not fail to be treated as a QDRO solely because of the time at which it is issued.
- Example 1—DROs issued after a participant’s death: If a plan administrator finds a DRO deficient, and the participant dies shortly thereafter while actively employed, a second DRO correcting the defects in the first order may be submitted and considered, even though the participant is no longer alive. This issue has been the subject of several cases and the status of post-death QDROs has been very unclear. The DOL guidance helps to clear up the circumstances under which these orders can be QDROs.
- Example 2—DROs issued after a participant divorces: If a former spouse submits a DRO requiring the former spouse to be treated as the participant’s surviving spouse for purposes of receiving a death benefit payable under the terms of the plan, the order does not fail to be treated as a QDRO solely because the ex-spouse no longer meets the definition of a surviving spouse.
- Example 3—DROs issued after an annuity starting date: If a participant commences receipt of a single life annuity after the spouse waived his or her surviving spousal rights, and the participant and the spouse divorce after the annuity starting date, a DRO providing that the spouse should receive half of the participant’s annuity payments after a specified future date may still be considered for treatment as a QDRO, even though the order was issued after the annuity starting date.
Other Requirements and Protections Applied to QDROs Remain Unchanged
Significantly, the DOL’s guidance is carefully phrased to indicate when DROs will not fail to be QDROs solely because of factors relating to the order and/or timing of the issuance of the DRO. DROs still have to be evaluated for compliance with all of the other technical qualification requirements under ERISA and the Code. For example, even if the timing of the issuance of a DRO will not disqualify it, the DRO will not be qualified if it would require the plan to: (1) provide any type or form of benefit, or any option, not otherwise provided under the plan; (2) provide increased benefits determined on the basis of actuarial value; or (3) pay benefits to an alternate payee that are required to be paid to another alternate payee under another order previously determined to be a QDRO.
Separately, the PBGC issued a new edition of its 2003 handbook on QDROs and how they are administered by the PBGC. This version of the PBGC guidance updates the rules based on the PBGC’s operating experience and changes to the PBGC’s payment rules. The PBGC handbook includes a description of the PBGC’s benefit payment options, an explanation of the earliest date that a participant and alternate payee may start receiving benefit payments, and new model QDROs, including orders that provide for child support and for a surviving spouse benefit only. Although as a technical matter the PBGC handbook only applies to benefits paid by the PBGC, the forms and explanations provide very helpful guidance for plan administrators of ongoing plans who are looking for how to administer QDROs.
Implications for Plan Administrators
In light of this new QDRO guidance, plan administrators may want to review their QDRO procedures and checklists. QDRO administration can be quite technical and confusing. When the government publishes helpful tools, it is worth the time and effort to review the current processes and make sure they are up-to-date and accurate.