Pension "Q.D.R.O."
Pensions and other forms of deferred compensation such as 401(k) plans and stock options are subject to California's community property laws, as are most other assets acquired between the dates of marriage and separation. A "Qualified Domestic Relations Order" (QDRO) is a court order apportioning the parties' interests in this property and is directed at the entity handling the deferred compensation account.
The QDRO was instituted as a result of the 1984 Retirement Equity Act in order to protect spouses from losing pension benefits to which they might be entitled. A QDRO is an order of the court directed at a retirement plan administrator, dividing the parties' respective interests in the plan in accordance with applicable law.
The question of whether a QDRO is required in a particular case depends upon several factors. Generally a QDRO is required to divide Defined Benefit Plans (e.g. most private "pension" or "retirement" plans) and Defined Contribution Plans (e.g. most profit sharing and 401(k) plans). QDRO rules do not apply to Governmental Plans (e.g. PERS and STRS), however, a different type of court order is still required in most cases to divide these benefits.
A QDRO is not needed to divide assets in Individual Retirement Accounts (IRAs). IRA assets may be transferred between spouses without incurring tax liability if the transfer is made pursuant to a written divorce decree or Marital Settlement Agreement.
Frequently Asked Questions
WHAT IS A QDRO?
A QDRO, or Qualified Domestic Relations Order, is basically a court order directed at a deferred compensation plan that orders the plan to divide interests in an account pursuant to marital property law. The QDRO was instituted as a result of the 1984 Retirement Equity Act in order to protect spouses from losing pension benefits to which they might be entitled.
It may sound simple, but it isn't. Proper QDRO compliance requires close attention to detail and careful legal review and plan interpretation.
WHAT IS THE DIFFERENCE BETWEEN A "DEFINED BENEFIT PLAN" AND A "DEFINED CONTRIBUTION PLAN"?
With a defined benefit plan, the amount of the participant's benefit is based on a formula that typically takes into account the participant's years of service, age, and compensation. Based on these factors the participant will receive a "defined monthly benefit at retirement. Distribution of benefits cannot begin until the participant attains early retirement age as defined by the plan (e.g., age 55 with 10 years of service). Additionally, distribution typically is made in the form of a monthly annuity for the life of the participant or of the joint lives of the participant and surviving spouse. Also, benefits under a DBP are federally insured by the PBGC in the event the plan is under funded. Some examples of common names for defined benefit plans include "ABC, Inc. Retirement Plan"; "ABC, Inc. Employee Retirement Plan"; or "ABC, Inc. Employee Pension Plan". Plan names can sometimes be misleading and you should check the plan's provisions to determine the exact type of plan you are dealing with.
A defined contribution plan, on the other hand, has several subcategories that lend to various plan names. Some names make it clear what type of defined contribution plan is involved. For instance, "ABC, Inc. Profit Sharing Plan" or the "ABC, Inc. 401(k) Plan". Plan names can also be vague such as "ABC, Inc. Savings Plan" or the "ABC, Inc. Deferred Compensation Plan". The type of defined contribution plan determines the method used to fund the participant's retirement assets. Unlike the defined benefit plan where the "benefit" is defined, here the "contribution" is defined. Distributions from defined contribution plans are often made in lump sum payments or rollovers to IRAs and may be made to a participant's former spouse pursuant to a QDRO before the participant is eligible to receive a distribution. The following are some examples of defined contribution plans:
(1) A 401(k) plan is funded by participant salary deferrals - meaning that a participant voluntarily elects to have the employer transfer a portion of his or her pay to the plan on a pre-tax basis. Sometimes a 401(k) plan will also allow the participant to make after-tax contributions.
(2) A Profit Sharing Plan is funded by employer contributions based on a formula tied to the employer's profits and employee's compensation (e.g., the employer contributes an amount equal to 5% of an employee's annual compensation for the plan year).
(3) A Money Purchase Plan is funded by mandatory company contributions and is allocated to participants based on their compensation.
ARE THERE ANY ALTERNATIVES TO USING A QDRO TO DIVIDE PROPERTY INTERESTS?
Answer - YES.
A QDRO accomplishes an "in kind" division of the deferred compensation account. This type of property division is accomplished whereby the court defines a formula for the future apportionment of the retirement benefits, as and when received.
The parties may, however, choose to divide the account without a QDRO through a "cash out" approach. Under the "cash out" approach, the court assigns the entire pension to the employed spouse and awards other community assets equal in value to the community interest in the retirement benefits to the nonparticipant spouse (using actuarial present value). This approach finds approval in the case of In re Marriage of Bergman (1985) 168 Cal.App3d 742.
DO QDRO RULES APPLY TO GOVERNMENTAL PLANS?
Answer - NO.
The QDRO rules do not apply to these plans because governmental plans are exempt from ERISA and IRC. Rules governing these plans are codified in federal, state or local statutes. A court order is still required in most cases to divide governmental plans. These orders must meet strict statutory guidelines concerning court ordered benefits.
Governmental plans include all retirement plans (whether of the defined benefit or defined contribution variety) maintained by the federal, state, local government or political subdivision thereof. On the federal level this includes Military plans, Civil Service Retirement System (CSRS), Federal Employees' Retirement System (FERS), Railroad Retirement Plan, and Federal Thrift Savings Plan. On the state level this includes Public Employees' Retirement System (PERS), State Teachers' Retirement System (STRS), and Judges' Retirement System. On the local level (in Los Angeles) this includes the LA City Employees' Retirement System (CERS), LA County Retirement Association (LACERA), and LA Deferred Compensation Plan - to name a few.
DO GOVERNMENTAL PLANS REQUIRE JOINDER?
Joinder requirements depend on the plan involved. Some plans require joinder. Other plans will not accept joinder.
IS A QDRO NEEDED TO DIVIDE AN INDIVIDUAL RETIREMENT ACCOUNT (IRA)?
Answer - NO.
A QDRO is not needed to divide assets in an IRA. IRA assets may be transferred between spouses without incurring tax liability if the transfer is made pursuant to a written divorce decree or marital settlement agreement.
DO I HAVE AN INTEREST IN MY SPOUSE'S PENSION IF THE PENSIONS RIGHTS HAVEN'T VESTED YET?
STATUTE PROVIDES:
Under In re Marriage of Brown (1976) 15 Cal.3d 838, nonvested pension rights acquired during marriage are community property subject to division. The rationale is that pension benefits are not mere expectancies, but a form of deferred compensation for services rendered. A division of community property which awards one spouse the entire value of this asset, without any offsetting award to the other spouse, does not represent the equal division of community property contemplated by Family Code §2550.
