We always suggest that the applicable division order for a retirement asset—whether it be a qualified domestic relations order (QDRO), a division of property order (DOPO), court order acceptable for processing (COAP), etc.—be completed and filed with the plan as soon as possible. In fact, if the parties have agreed to the terms of division, we suggest having the division order drafted prior to the final hearing so the court can execute the division order at the same time as finalizing the divorce/dissolution. We suggest this because life is unpredictable and there can be adverse consequences if there is a delay in completing the division order and filing it with the plan.
This post will outline just a few of the issues that can occur if there is a delay in filing a division order. For the sake of brevity, we will only discuss the issues that arise when there is a delay in filing a QDRO with a qualified, defined contribution (DC) plan. But be aware, a delay in filing a division order can cause problems with any retirement asset.
One of the parties can die unexpectedly and complicate the division process. The Department of Labor provided guidance that the timing of a QDRO should not matter (i.e., if a QDRO is filed after death it should still be acceptable). See Department of Labor, QDROs The Division of Retirement Benefits Through Qualified Domestic Relations Orders (available at: https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/qdros.pdf). However, there are a number of DC plans that ignore this guidance and will not process a QDRO after either the participant or alternate payee has died.
There are some plans that will process a QDRO after the participant dies but will not do so if the alternate payee dies. These plans take the position that the estate of a former spouse does not fit the definition of an alternate payee under the Employee Retirement Income Security Act of 1974 (ERISA). See Section 206 of ERISA (29 U.S.C. 1056) (which defines an “alternate payee” for the purposes of a QDRO as a “spouse, former spouse, child, or other dependent of a participant”).
Further, even if the plan would accept a QDRO after the death of the participant, the assets may be paid out if there is a delay. For example, if the plan has no notice that funds are owed to former spouse, the plan will just pay out the assets to the participant’s death beneficiary, who may not be the former spouse. This could lead to a probate battle.
If there is a delay in filing a QDRO and there are no other freezes placed on the DC account, the participant is free to do with the account as he/she pleases—subject, of course, to the terms of the plan. The participant could remove all of the funds and roll them into an individual retirement account. If the participant is the correct age, he/she may take a distribution of the assets. The participant could take a loan against the assets that will encumber the portion intended for the alternate payee. Under these scenarios any collection of the amount owed to alternate payee would have to come from the participant directly—not the plan.
DC plans frequently change record keepers—the entity that keeps the records of plan assets and individual account balances. When the plan changes record keepers, generally, the new record keeper will not have any records held by the previous record keeper (i.e., the plan cannot calculate the balance of a participant’s account for any period prior to when the new record keeper was engaged). This means if one waits to complete a division order, the plan may not be able to calculate the participant’s balance as of the date of divorce.
We understand that sometimes delays in filing the division order are unavoidable. However, if at all possible, file the division order shortly after the divorce or the case could become more complicated.
How we can help: Our experts are here to discuss your case and help you to determine the best practices. With our five to seven business day turnaround time (once we have all of the information we need), we can help you complete the division orders in a timely manner. Further, if any of the unfortunate situations set forth above, or some other complication occur, we can help lead in you in the right direction to receive the assets your client is owed.