In recently published Advisory Opinion 2004–02A, the Department of Labor (the “DOL”) provides guidance concerning modifications made to pre-existing qualified domestic relations orders (“QDROs”). The guidance explains that plan administrators who receive court-approved domestic relations orders (“Orders”) that modify the terms of a pre-existing QDRO must honor such Orders, if the Order otherwise is determined to meet the statutory requirements of a QDRO under Section 206(d)(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).
A plan administrator requested the DOL’s guidance concerning whether an Order that it had determined to be a QDRO in 1997 (the “1997 QDRO”) could be modified by a subsequent court-approved Order issued in 2002 (the “2002 Order”) that reduced the former spouse’s interest in the participant’s benefit. The plan began paying benefits to both the participant and the alternate payee under the terms of the 1997 QDRO, after the participant retired in 2002 and before the plan administrator had made a determination on the qualified status of the 2002 Order.
Subject to the issuance of an advisory opinion from the DOL, the plan administrator later notified the participant that it had made a tentative determination that the 2002 Order was not qualified due to the reduction in the amount of the benefit previously assigned to the alternate payee under the terms of the 1997 QDRO. Because the 2002 Order stated that the 1997 QDRO provisions were to be “deleted,” the plan administrator believed that the reduction under the 2002 Order was to be applied retroactively. In its determination, the plan administrator noted that it would seek recovery of any “overpayments” made to the alternate payee under the terms of the 1997 QDRO, if the DOL concluded that the 2002 Order could be treated as a QDRO. If no “overpayments” were returned, the plan administrator stated that it would withhold future payments to the alternate payee until such amounts were recovered.
Qualified Status of the 2002 Order
The DOL first determined that the 2002 Order could be considered a QDRO. In the DOL’s view, ERISA does not preclude a state court (or other appropriate state agency or instrumentality) from altering or modifying a previous order involving the same participant and alternate payee, as long as the new order itself meets the statutory requirements. A plan administrator could only conclude that an Order was not qualified based on the requirements set forth in ERISA. Under ERISA, an Order cannot require a plan to pay benefits to an alternate payee that are required to be paid to another alternate payee under another order previously determined to be a QDRO. Because the modification of the assignment of benefits under the 1997 QDRO pertained to the same alternate payee, the DOL concluded that the 2002 Order did not violate this statutory requirement and could be considered a QDRO (assuming it had satisfied the remaining statutory QDRO requirements), regardless of the reduction in the amount of the assignment previously awarded to the alternate payee under the pre-existing 1997 QDRO. (Presumably, neither the plan administrator in this case nor the DOL would object to a subsequent Order that increased the alternate payee’s interest because such an Order, which otherwise satisfied the statutory QDROrequirements, could simply be considered an additional QDRO as opposed to a modification of the old Order.)
Application on a Prospective Basis
The DOL next determined that the plan administrator did not have the authority to seek recovery from the alternate payee with respect to the amounts paid under the terms of the 1997 QDRO. Nor could it withhold future payments to the alternate payee with respect to amounts required to be paid under the 2002 Order. While the plan administrator took no action to preserve the amounts that would be affected by the 2002 Order during its consideration of that Order’s qualified status (as generally required under ERISA), the DOL noted that it was not required to do so under these circumstances. ERISA does not require segregation of amounts that have already been determined to be payable to an alternate payee under the terms of a pre-existing QDRO, only amounts potentially payable during the period in which an Order’s qualified status is being determined. Because the plan administrator had determined the 1997 QDRO to be qualified, the DOL asserted that the plan was required to pay benefits in accordance with its terms. The plan had no further obligation to the participant and the alternate payee with respect to payments made under the 1997 QDRO because benefits were paid in accordance with its determination and ERISA’s segregation rule. Because the plan administrator had no authority to request recovery, the DOL concluded that the 2002 Order should be treated as a QDRO on a prospective basis only.
The DOL guidance makes clear that modifications made to a pre-existing QDRO may be enforceable against a plan. If the new Order is determined to satisfy the statutory QDRO requirements, then the plan must honor the terms of the new Order as a QDRO, even where the new Order results in the reduction of the amount of the original assignment currently being paid to the alternate payee under the terms of the pre-existing Order. In this case, the DOL stated that the modifications applicable under a new Order should be applied prospectively to future payments. Although the guidance does not require the preservation of amounts in question during the period in which the subsequent Order’s qualified status is being determined, the guidance suggests in a footnote that it may be desirable to establish a separate account for such amounts during this period, especially where benefits under the pre-existing QDRO have already commenced. As a result, it may be advisable for plan administrators to review their QDRO procedures to determine whether any changes are necessary in light of this guidance.