What’s a QDRO and what are my fiduciary duties?
Unfortunately, not every marriage is destined to have a happily ever after. And while divorce is an extremely personal event, it also has implications for plan sponsors. When participants divorce, you’re responsible for evaluating and processing requests to divide their 401(k) assets. Fulfilling this role requires a basic understanding of qualified domestic relations orders (QDROs).
What’s the purpose of a QDRO?
Under 401(k) rules, participants are the sole owners of their 401(k) accounts. This means that plan sponsors can’t just give the money to someone else without proper legal documentation. A QDRO recognizes the right of an alternate payee, such as a spouse or former spouse, to receive all or a portion of a participant’s 401(k).
For example, it might state that the former spouse is entitled to 50% of the 401(k)’s growth during the marriage. What does this mean? Let’s say John’s 401(k) was worth $50,000 when he married Lisa. At the time of their divorce, it was worth $100,000, which means the growth during their marriage was $50,000. According to the QDRO, Lisa would be entitled to $25,000 of that growth. Of course, this is a simple hypothetical example. The actual division will vary based on the terms of the participant’s QDRO.
QDROs are typically drafted by a state court or state agency that has the authority to issue judgments and approve property settlement agreements. And they aren’t just for the division of marital property. QDROs can also authorize the use of 401(k) assets to pay child support.
What makes a QDRO a QDRO?
When a domestic relations order (DRO) comes across your desk, you first need to determine if it’s a QDRO before doing anything else. You can’t authorize the transfer or withdrawal of 401(k) assets if the order doesn’t meet the QDRO requirements set forth in ERISA.
A QDRO must contain¹: |
A QDRO must not require a plan¹: |
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You may want to ask your ERISA attorney for help in deciding if the QDRO you’ve received satisfies these requirements. Additionally, you can charge participants a reasonable fee to help cover the cost of making this determination. This fee is usually deducted directly from the participant’s 401(k) account.
What are your fiduciary responsibilities?
ERISA also provides clear guidance about your QDRO responsibilities. Here are the key things you need to do²:
- Create written procedures for determining if an order is a QDRO and for administering QDRO withdrawals
- Notify the participant and alternate payee when you receive an order and provide them with a copy of your QDRO procedures
- Determine if the order is a QDRO within a reasonable period of time and notify the participant and alternate payee of your decision
- Separately account for and preserve the amounts that would be payable to the alternate payee while the order is under review
What are some general guidelines for processing QDRO withdrawals?
An alternate payee doesn’t automatically get the money once an order is determined to be a QDRO. Like other types of 401(k) withdrawals, a formal distribution request must be submitted, and you should process the request according to your plan’s distribution procedures. This includes giving the alternate payee the appropriate disclosures about their distribution options. For example, a former spouse may be able to:
- Receive a lump sum—the withdrawal would be taxable to the alternate payee but exempt from the 10% early withdrawal penalty
- Keep the segregated assets in the plan, if permitted by you
- Receive regular distributions from the segregated account, if offered under your plan
- Roll the money over to an IRA or another retirement account
It’s worth noting that QDRO withdrawals used for child support are taxable to the participant, not the alternate payee.
Act on fact, not emotion
Tensions often run high during a divorce, and you may receive conflicting information from the participant and the alternate payee. The QDRO rules are designed to help you remove emotion from the equation and focus strictly on the facts—what does the order say, and does it qualify as a QDRO?
1 “FAQs about Qualified Domestic Relations Orders,” The U.S. Department of Labor Employee Benefits Security Administration. 2 “FAQs about determining Qualified Status and Paying Benefits,” The U.S. Department of Labor Employee Benefits Security Administration.
Important disclosures
This content is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made.
This content is not intended to be an exhaustive review of fiduciary duties under ERISA. The objective is to highlight the key responsibilities of a plan fiduciary and present the challenges that plan fiduciaries may face in discharging their duties. John Hancock is not in a position to provide legal advice concerning your plan or your role as plan fiduciary, and the information included should not be taken as such. If legal advice or other expert assistance is required, please consult your legal counsel.
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