Practice Tip: Why Plan Administrators Reject QDROs

The administrator of a retirement benefit plan has the final say about the acceptability of a Qualified Domestic Relations Order (QDRO). Many parties (and some attorneys) think that if the judge orders certain terms, the plan must comply with that order. However, the plan cannot be made to provide any form of benefit that is not otherwise available under the terms of the plan itself, so conflicts can arise, leading to rejection.

If there are many reasons that proposed QDROs are rejected, what are a few of the more common ones, and how can they be avoided?

1. The Wrong Plan Name

The parties very often to do not know the correct name of the pension plan to be divided. Moreover, as companies are bought and sold, the names of plans change. The plan name must be the correct, complete legal name. Often, the parties get confused and use the name of the fiduciary trust company ' the money holder ' as the plan name. If the pension-holding spouse has a 401(k) plan with ABC Company but the money is held in accounts with Vanguard, the correct plan name is (probably something like) ABC Company 401(k) Plan NOT Vanguard 401(k) Plan.

2. The QDRO Is for the Wrong Type of Plan

There are very basic differences between a defined benefit plan and a defined contribution plan, and writing a QDRO for a Defined Benefit Plan when the plan is actually a Defined Contribution Plan (or vice versa) means rejection.

3. Increases or Decreases in a Defined Contribution Plan Are Not Addressed

The lapse between the date of valuation and the date of distribution means that the QDRO must address the provision for increases and/or decreases in the amount of money going to the alternate payee. The Alternate Payee need not automatically share in gains and losses, but the QDRO should address the option.

4. The Valuation Date Is Not Feasible or Permitted

Some plans permit valuations only on specific dates, such as the end of the month or the end of the quarter. Moreover, some Defined Benefit Plans cannot determine the accrued benefit in the distant past.

5. Problems with the Beneficiary for Defined Contribution Plan

In the event the alternate payee dies before he or she receives distribution, some plans require that the QDRO name additional alternate payees. Alternatively, the QDRO may incorporate language that provides that the money is paid to the Alternate Payee's estate in the absence of a designated beneficiary.

6. Combining a Percentage and'a Dollar Amount

When the language used is not clear and concise, problems arise, for example, if the QDRO states that the alternate payee receives “50% of the account balance less $6,000.” Written that way, it is not clear whether the $6,000 gets subtracted first, then 50% is taken; or whether 50% is taken, then $6,000 gets subtracted.

7. The Form of Benefit Designation for Defined Benefit Plan

Not all plans allow the same benefit options. Occasionally, a plan will not allow the alternate payee to choose to have the benefit paid for the lifetime of the alternate payee instead of the lifetime of the participant, and making that choice in the QDRO will cause rejection. Almost all plans do not allow any benefit form options for the alternate payee once the participant has begun receiving benefits. Therefore, providing that the alternate payee has options in the QDRO can cause rejection.

8. When Payments Begin

QDROs for both Defined Benefit Plans and Defined Contribution Plans may have problems with the start of payments. In a Defined Contribution Plan, this happens when the alternate payee requests an immediate distribution even though the plan does not so allow. In a Defined Benefit Plan, it happens when the alternate payee requests a time for benefits to begin that is not allowed in the plan.

QDROs are also rejected when no starting date is requested. Benefits can begin either upon: “a) early retirement age, or b) regular retirement age, or c) As otherwise provided in the plan.” The QDRO should usually allow the alternate payee the option of choosing when payments begin ' always, however, subject to the plan terms. Many older decrees stated that the alternate payee would receive a share of the benefits “if, as and when” the participant receives benefits, so the above options would not be consistent with that decree.

9. The Form of Payment

Designating a form of payment that is not consistent with plan guidelines will ensure a rejection by the plan administrator. Many parties mistakenly assume that a traditional Defined Benefit Plan will allow a lump-sum distribution; the reality is that very few offer that form of payment.

Conclusion

Getting a plan administrator to accept a QDRO is not as simple as just presenting it. No matter what the judge has decreed, a QDRO will not be acceptable to the administrator if it conflicts with the plan's terms or lacks some very basic information. So matrimonial lawyers must be sure that their QDROs are compliant with the plan and contain the requisite information or risk headaches down the road for their clients, and themselves. ' Theodore K. Long, Jr., QdroDesk.com; PensionAppraisalDesk.com.

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The administrator of a retirement benefit plan has the final say about the acceptability of a Qualified Domestic Relations Order (QDRO). Many parties (and some attorneys) think that if the judge orders certain terms, the plan must comply with that order. However, the plan cannot be made to provide any form of benefit that is not otherwise available under the terms of the plan itself, so conflicts can arise, leading to rejection.

If there are many reasons that proposed QDROs are rejected, what are a few of the more common ones, and how can they be avoided?

1. The Wrong Plan Name

The parties very often to do not know the correct name of the pension plan to be divided. Moreover, as companies are bought and sold, the names of plans change. The plan name must be the correct, complete legal name. Often, the parties get confused and use the name of the fiduciary trust company ' the money holder ' as the plan name. If the pension-holding spouse has a 401(k) plan with ABC Company but the money is held in accounts with Vanguard, the correct plan name is (probably something like) ABC Company 401(k) Plan NOT Vanguard 401(k) Plan.

2. The QDRO Is for the Wrong Type of Plan

There are very basic differences between a defined benefit plan and a defined contribution plan, and writing a QDRO for a Defined Benefit Plan when the plan is actually a Defined Contribution Plan (or vice versa) means rejection.

3. Increases or Decreases in a Defined Contribution Plan Are Not Addressed

The lapse between the date of valuation and the date of distribution means that the QDRO must address the provision for increases and/or decreases in the amount of money going to the alternate payee. The Alternate Payee need not automatically share in gains and losses, but the QDRO should address the option.

4. The Valuation Date Is Not Feasible or Permitted

Some plans permit valuations only on specific dates, such as the end of the month or the end of the quarter. Moreover, some Defined Benefit Plans cannot determine the accrued benefit in the distant past.

5. Problems with the Beneficiary for Defined Contribution Plan

In the event the alternate payee dies before he or she receives distribution, some plans require that the QDRO name additional alternate payees. Alternatively, the QDRO may incorporate language that provides that the money is paid to the Alternate Payee's estate in the absence of a designated beneficiary.

6. Combining a Percentage and'a Dollar Amount

When the language used is not clear and concise, problems arise, for example, if the QDRO states that the alternate payee receives “50% of the account balance less $6,000.” Written that way, it is not clear whether the $6,000 gets subtracted first, then 50% is taken; or whether 50% is taken, then $6,000 gets subtracted.

7. The Form of Benefit Designation for Defined Benefit Plan

Not all plans allow the same benefit options. Occasionally, a plan will not allow the alternate payee to choose to have the benefit paid for the lifetime of the alternate payee instead of the lifetime of the participant, and making that choice in the QDRO will cause rejection. Almost all plans do not allow any benefit form options for the alternate payee once the participant has begun receiving benefits. Therefore, providing that the alternate payee has options in the QDRO can cause rejection.

8. When Payments Begin

QDROs for both Defined Benefit Plans and Defined Contribution Plans may have problems with the start of payments. In a Defined Contribution Plan, this happens when the alternate payee requests an immediate distribution even though the plan does not so allow. In a Defined Benefit Plan, it happens when the alternate payee requests a time for benefits to begin that is not allowed in the plan.

QDROs are also rejected when no starting date is requested. Benefits can begin either upon: “a) early retirement age, or b) regular retirement age, or c) As otherwise provided in the plan.” The QDRO should usually allow the alternate payee the option of choosing when payments begin ' always, however, subject to the plan terms. Many older decrees stated that the alternate payee would receive a share of the benefits “if, as and when” the participant receives benefits, so the above options would not be consistent with that decree.

9. The Form of Payment

Designating a form of payment that is not consistent with plan guidelines will ensure a rejection by the plan administrator. Many parties mistakenly assume that a traditional Defined Benefit Plan will allow a lump-sum distribution; the reality is that very few offer that form of payment.

Conclusion

Getting a plan administrator to accept a QDRO is not as simple as just presenting it. No matter what the judge has decreed, a QDRO will not be acceptable to the administrator if it conflicts with the plan's terms or lacks some very basic information. So matrimonial lawyers must be sure that their QDROs are compliant with the plan and contain the requisite information or risk headaches down the road for their clients, and themselves. ' Theodore K. Long, Jr., QdroDesk.com; PensionAppraisalDesk.com.

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