The Employee Retirement Income Security Act (ERISA) makes retirement plan benefits inalienable, meaning only the beneficiary can claim them. Divorce presents a rare exception to this ERISA protection. If an ex-spouse obtains a court order to share in the employer-provided retirement benefits, the employer plan receives notice in the form of a Qualified Domestic Relations Order (QDRO). Given the June 26, 2015 U.S. Supreme Court decision in Obergefell v. Hodges (U.S. 2015), same-sex divorces will likely cause an increase in QDROs in the not-too-distant future.
Essentially, a QDRO is a court order directing the plan to divide the participant’s benefit between the participant and the former spouse. It is imperative that the employer review the QDRO upon receipt to determine whether it is actually “qualified” pursuant to the law, and then determine how the plan must handle it. The QDRO process is not difficult in itself, but the consequences of a misstep are so great that it is cause for heightened attention. Mishandling an employee’s retirement plan following notification of the employee’s divorce can trigger IRS fines, penalties, and ultimately, retirement plan disqualification.
QDROs are specific as to form and amount; nonetheless, plan provisions still govern and must be followed in spite of what a QDRO might order. Sometimes the employer plan prohibits paying a QDRO until retirement age. In this case, the plan must set up a new account for the ex-spouse and treat that person as another plan participant, rather than pay funds directly to the ex, as a QDRO might order. It is key to follow the law and the plan carefully upon receipt of a QDRO, as this is one of the few provisions that, if mismanaged, can result in full plan disqualification.
On occasion, an employer receives two conflicting QDROs claiming entitlement to the same benefits. The employer plan must then decide which is correct, if any, and which must be rejected. If the plan makes a wrong decision, it can be liable for paying the correct one, even after paying the incorrect one. To ensure a correct decision, plans may file an interpleader action in federal court. The court makes the decision on behalf of the plan, and the plan merely pays filing and attorney fees for that decision. Alternatively, the employer can proactively plan for the more common conflicts in QDROs and amend the plan document to address and resolve these within the document, thereby avoiding the need to file an interpleader action.
What actions should an employer take now to better position their retirement plans for compliant processing of QDROs, particularly in light of the Obergefell decision?
Review the QDRO language and Beneficiary language in the plan document. Some documents reference a separate Employer QDRO policy to be provided upon request. Sometimes, no such policy actually exists until a QDRO is received and the employer scrambles to hire an ERISA attorney to create one.
Conflicts in QDROs and Beneficiary Designation disputes typically involve multiple marriages and ex-spouses. Sometimes an ex-spouse will not file the QDRO with the plan until the employee gets close to retirement age or dies. This is where many conflicts arise. For example, an estate files a claim for benefits at the same time the ex-spouse claims them. It may be worth amending the plan document to provide an automatic voiding of any completed Beneficiary Designation form that has not been updated following a divorce. This can prevent prior spouses from claiming benefits that may be due a current spouse.
Ensure that you also amend/update your summary plan description (SPD) should you amend any provision in your plan document.
Review your documents and current beneficiary form language. Ensure that there is no language in it that might appear discriminatory to same-sex couples. Update documents and forms as needed to provide for automatic payment to the current spouse or estate under certain circumstances.
Sometime in 2015, it would be wise to reissue your retirement plan Beneficiary Designation form to each participant and advise them to update with current information. Should any participant prefer that children from perhaps a prior marriage be the default beneficiaries, rather than a second or third spouse, a notarized spousal consent agreeing with this decision must also be included on the form. Otherwise, the request will be void and the spouse will receive the benefits.
Implement a new process requiring any HR, payroll or benefits employee who receives notice of an employee’s new marriage or divorce to notify the other areas of benefits and HR. The process should also include automatic forwarding of a new Beneficiary Designation form for each retirement plan, as well as any life insurance benefits, and advising the employee to update and resubmit each of these forms.
As a matter of best practice, employers who sponsor retirement plans should ensure that their plan documents are precise, updated, include no discriminatory terms, and that each benefit is paid in accordance with the plan’s terms. This should minimize the risk of an employer having to get involved in resolving competing claims and also protect the plan from inadvertent fines, penalties and disqualification.