During a divorce, parties often have employer sponsored retirement accounts to assign pursuant to their marital settlement agreement. To assign these accounts incident to divorce, the parties must enter a Qualified Domestic Relations Order (“QDRO.”) A QDRO is a domestic court order that allows sponsors of qualified retirement plans such as 401(k)s to transfer accrued employee retirement directly to a spouse, former spouse, child, or other dependent without facing penalties[1].
A rightful concern of many people going through a divorce is what will happen to the retirement they were awarded during the dissolution of their marriage or settlement agreement if a QDRO was not entered in court in a timely fashion; and the participant in the employer sponsored plan passes away before the QDRO is entered into court and processed by the Plan Administrator.
To address this concern, Congress in 2006 passed bipartisan legislation called the Pension Protection Act, detailing in 29 C.F.R 2530.26, “A domestic relations order issued after the Participant’s death, divorce, or annuity starting date, or subsequent to an existing QDRO, will not fail to be treated as a QDRO solely because of the timing of issuance”. While hopeful that this regulation would provide some protection to the alternate payee (the party receiving the share of the retirement), depending on the plan type and property award, a posthumous QDRO might not accomplish the intent of the parties’ Settlement Agreement and leave the alternate payee scrambling in probate in hopes to receive what was assigned to them in the divorce.
For example, let’s say the wife (alternate payee) was assigned 50% of an account with a $200,000 balance as of the parties’ dissolution and no QDRO was entered into court or received by the plan prior to the participant’s death (account holder.) As the plan would have no knowledge of the divorce or property award to the former spouse, upon hearing of the participant’s death, the plan will direct the account balance to be paid the participant’s beneficiaries on file.
This could put the former wife in a difficult situation if she is not included in the participant’s estate forcing her to argue for her awarded share posthumously. To further complicate matters because the plan is subject to ERISA, federal preemption could force the argument into federal court, further delaying and complicating the alternate payee from receiving her awarded share incident to divorce. While life events are not necessarily foreseeable, we do have a few tips to help attorneys and litigants combat post-decree litigation when dealing with posthumous QDROs.
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- Contact the Plan Administrator as soon as an agreement has been reached between the parties: Letting the administrator know that a QDRO is imminent forces a hold on the participant’s account and prevents the plan from paying to beneficiaries as they await a court order. While sending a draft QDRO for pre-approval is important for placing a hold on the account, it’s important to follow through with getting the final document entered into court and sent to the administrator. An entered court order alone is not enough, the order must be sent and processed by the plan.
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- Do not let perfection get in the way of progress: If there is knowledge that a participant is ill, or a worry about their lifestyle, sending a draft of an agreement or the parties’ marital settlement will suffice while you draft a document that gets entered and approved by both the plan and the court.
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- Once a death happens, act quickly to get the QDRO entered into court and sent to the administrator: Alternate Payees should work quickly to add the Participant’s estate to the divorce proceedings, making them a liable party. By adding a proper representative, the estate will have notice to prevent an improper payout, and the beneficiaries will not take an improper distribution. It is always easier to freeze money in a plan account than to try to get it back from a beneficiary once received.
Our office is ready to assist you, no matter the stage of your dissolution. Please reach out early to understand the retirement assets in your marital estate and we can continue to consult and advise as you move through your divorce and finally draft the QDROs and DROs you need to properly assign the benefits to each party.
[1] The assignment of retirement assets incident to divorce is detailed by the agencies and regulations of the Department of Labor (“DOL”), Internal Revenue Service (“IRS”) and federal laws detailed in the Employee Retirement Income Security Act (“ERISA.”)
Emma Zurek, Law Clerk
Anne Prenner Schmidt, Esq.