Qualified domestic relations orders, commonly known as “QDROs”, frequently confuse individuals going through a divorce. However, they are actually relatively simple in concept, though must be drafted with extreme care and attention to detail to ensure they effectuate the intent of the parties of the divorce.
A QDRO is an order approved by a judge pertaining to retirement assets to someone other than the participant. While the parties to a divorce can agree to virtually all terms of marital settlement agreements, any provision related to payment of retirement assets to someone other than the participant—for example, a former spouse or a child—must be approved by a judge.
Under federal laws governing retirement plans, otherwise known as ERISA (Employee Retirement Income Security Act), only certain individuals are eligible to receive another’s retirement benefits under a QDRO. 29 U.S.C. § 1056(d)(3)(B)(ii)(I). These individuals include current or former spouses, children, and dependents. 29 U.S.C. § 1056(d)(3)(B)(ii)(I).
QDROs must contain certain information, including the participant and alternate payee names, the name of the retirement plan, the amount of the payment to be paid to the alternate payee, and the length of the payments to the alternate payee. 29 U.S.C. § 1056(d)(3)(C)(i)-(iv).
QDROs are generally of two types—shared payment or separate interest. The distinction is based upon the identity of whose life expectancy on which the alternate payee’s payments are based. If the payments are based on the participant’s life expectancy, the QDRO is a shared interest QDRO. In essence, the alternate payee receives a share, or portion, of the participant’s right to payment when the participant becomes eligible to begin receiving benefits. If the alternate payee dies before the participant, the alternate payee’s right to payment is absorbed by the participant. The participant is required to make certain elections under his or her plan to ensure that the alternate payee’s right to payments does not cease upon the death of the participant.
A separate interest QDRO is based upon the life expectancy of the alternate payee. The payment is based upon an actuarial calculation of the life expectancy of the alternate payee and is adjusted to equate to an appropriate amount for a lifetime annuity that equals that of the participant. This is done because ERISA prohibits increasing benefits under a QDRO, and failing to take a longer life expectancy of the alternate payee into consideration could potentially do just that.
Whether a shared payment or separate interest QDRO, it can provide a valuable negotiation point and strategy tool in the division of assets and liabilities between spouses in a divorce. It is important to discuss all aspects of a QDRO with your divorce attorney, because any misunderstanding about the terms of a QDRO can lead to a QDRO that does not do what you, as the client, intended or thought it would. Key considerations include the importance of the amount versus the length of payments and reversion interests.
David McLeod has been representing individuals facing divorce for over twenty years, and he is experienced in helping clients make long-term decisions such as those involved in structuring a QDRO. If you are an individual living in Georgia currently involved in or contemplating a divorce, contact Mr. McLeod today to set up a consultation. He can be reached at (770) 536-0202.