DOL Issues Final Rules on QDRO Distributions

Date: 6/28/2010
 ELBG Update 6_28_10

By Frank J. Del Barto

On June 10, 2010, the U.S. Department of Labor ("DOL") announced the issuance of a final rule ("the Rule") which clarify certain timing issues with respect to domestic relations orders and qualified domestic relations order (QDRO) under section 206(d)(3) of ERISA. The Rule, which the DOL was required to issue in response to a specific directive contained in the Pension Protection Act of 2006, is effective on August 9, 2010.

Section 206(d)(3) of Title I of ERISA and the related provisions of section 414(p) of the Internal Revenue Code provide a limited exception to the prohibition against the assignment or alienation of pension benefits. The exception permits a plan participant's benefits to be assigned to an alternate payee pursuant to a QDRO. An alternate payee is defined as the participant's spouse, former spouse, child or other dependent(s) provided for in a QDRO.

In accordance with the ERISA QDRO provisions, a plan sponsor is required to have specific administrative procedures in place to determine if a domestic relations order is to be considered a QDRO. The plan's procedures must (1) be reasonable, (2) be in writing, (3) require the prompt notification of participants and the alternate payees upon receipt of the order and (4) permit the alternate payee to designate representatives for notice purposes. Further, within a reasonable period of time, the plan administrator must determine whether the domestic relations order received by the plan will be considered a QDRO and notify the alternate payees of the plan's determination. The QDRO provisions also provide for a specific procedural protection that requires plan administrators to separately account for any amounts that would have been payable to the alternate payee for a period of up to 18 months during which the issue of the qualified status of the order is being determined.

In pertinent part, the Rule provides:

Subsequent Domestic Relations Orders: The new Rule provides that a domestic relations order that otherwise meets the requirements to be a QDRO will not fail to be treated as a QDRO solely because the order is issued after, or revises another domestic relations order or QDRO. Examples within the Rule illustrate (1) a subsequent order revising an earlier QDRO involving the same parties and (2) a subsequent order involving the same participant and a different alternate payee.

Timing of Domestic Relations Orders: The new Rule provides that a domestic relations order that otherwise meets the requirements of a QDRO will not fail to be QDRO solely because of the time at which it was issued. Examples within the Rule illustrate that a domestic relations order will not fail to be a QDRO solely because it was issued: (1) after the participant's death, (2) after the parties' divorce or (3) after the participant's annuity starting date.

Requirements and Protections: Lastly, the new Rule provides that any domestic relations order that meets the requirements above (Subsequent and/or Timing) are still subject to same requirements that apply to all QDROs and provides for specific examples to illustrate its application.

Because the determination of whether a domestic relations order is to be considered a "qualified" order is a fiduciary act under ERISA, we recommend that all plan sponsors review their written QDRO determination procedures and familiarize themselves with the new Rule's requirements and illustrative examples.