Don’t Be Shocked if Your QDRO Doesn’t Work…A QDRO is NOT Just a Form!
For those who have gone through a divorce, a QDRO may have been part of your agreement. A QDRO is a “qualified domestic relations order” and is required if a divorced couple splits certain retirement plans and want to avoid adverse tax consequences. A QDRO is NOT applicable to IRAs.
For example, assume Iris and Bob are married 30 years and are going through a divorce. Bob has $500,000 in his company’s 401(k) plan and Iris and Bob agree to split the 401(k) equally. If Bob took the money from his 401(k) and gave Iris her $250,000, adverse tax consequences would result (all would be taxed to Bob when he received the money and penalties could be incurred depending on Bob’s age). The Internal Revenue Service permits this division to occur without adverse tax consequences ONLY upon the court’s entry of a QDRO meeting the strict requirements of Section 414(p) the Internal Revenue Code.
Thus , if a QDRO is properly completed and entered by the court , then no adverse tax consequences result. Unfortunately, the QDRO is not always properly drafted as indicated in the recent case of Cingrani, Jr. vs. Sheet Metal Workders’ Local No. 73 Pension Plan.
Anthony began work as a sheet metal worker in 1978. He was married to Deborah and they divorced in 2002. As part of the divorce settlement, a QDRO was entered which entitled Deborah to 50% of Anthony’s vested interest in certain pension plans of which one was the Local 73 Pension Fund(“Pension Fund”). This Pension Fund did not begin payments to Anthony until he retired. At the time Anthony retired, Deborah would receive 50% of these payments. Anthony was still working at the time of the divorce. The QDRO did NOT address what would happen if Deborah died before Anthony’s retirement date.
Of course, the unexpected happened. Deborah passed away and when Anthony later tried to collect his benefits at his retirement date, the Pension Fund administrator stated that Deborah’s 50% share reverted to the Pension Fund. Anthony disagreed, and filed and received an amended QDRO from the court. Remember that this QDRO was entered AFTER Deborah’s death. The amended QDRO provided that, if Deborah died prior to her receiving benefits, then her share would revert to Anthony. The Pension Fund refused to honor the posthumous QDRO.
Anthony appealed the denial and the Pension Fund administrator denied his appeal. Anthony then filed suit in federal court which decided in favor of Anthony. The court, in its opinion, stated that the original QDRO provided that Deborah’s 50% interest would revert to Anthony and, even if the original QDRO did not make the reversion, the posthumous QDRO permitted the reversion to Anthony.
In determining that the original QDRO would have allowed Deborah’s funds to revert to Anthony if she died prior to receiving her share of the benefits, the court noted that, when a plan grants the administrator discretion to construe the plan terms, then the discretion can be overruled only if the decision was “arbitrary and capricious”. The court determined that the Pension Fund’s decision was arbitrary and capricious and thus the original QDRO worked. The court also determined that posthumous QDROs were allowed and that this posthumous QDRO met the formal requirements necessary to override the plan terms.
An interesting note in this case is that the decision specifically addresses posthumous QDROS and states that ERISA does not prohibit application of posthumous QDROs.
ADVICE: Obviously all of the legal costs, expenses and time could have been avoided if the QDRO had originally been drafted addressing all contingencies. This case indicates why a “form” document is not always the best solution. I have seen numerous QDROS that have either not been properly drafted or not been properly delivered to the company. Accordingly, the surviving spouse loses such benefits unless she proceeds with follow up and perhaps litigation which can be very costly and time consuming. These QDRO mistakes may be found only long after the divorce has concluded. Hire a QDRO expert to draft such a document. At the very least have a tax attorney experienced in QDROS review the draft QDRO.
WORD OF THE WEEK: ERISA is an acronym for the Employee Retirement Income Security Act of 1974 (ERISA) which is a federal law governing most voluntarily established pension and health plans in private industry to provide protection for individuals participating in these plans. ERISA requires plans (and their administrators) to provide participants with certain information of the plan and the features of the plan. Importantly, ERISA, places fiduciary duties on the companies or individuals who manage the plan and control such assets. ERISA is found in the United States Code and provisions are also found in the Internal Revenue Code.
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