Background

In general, under the Employee Retirement Income Security Act (“ERISA”) and corresponding provisions of the Internal Revenue Code (the “Code”), a participant’s benefits under a qualified retirement plan cannot be assigned or alienated. (ERISA § 206(d)(1); Code § 401(a)(13).) However, under an exception that is now familiar to most plan sponsors and plan participants, part or all of a participant’s benefits may be assigned to an “alternate payee” (typically a former spouse, child or other dependent) under a court-issued domestic relations order (a “DRO”) that constitutes a “qualified” domestic relations order (a “QDRO”).

The requirements for the QDRO exception, including both the substantive and procedural rules for determining whether a DRO is a QDRO, are set out in ERISA § 206(d)(3) and Code § 414(p). When a plan receives a DRO purporting to assign a portion of a participant’s plan benefits to an alternate payee, the plan administrator must make the determination of whether the DRO is a QDRO in accordance with those requirements.

Pension Protection Act of 2006

Over the years, although plan sponsors and plan administrators have become more practiced in processing QDROs, some questions have persisted, often involving issues of timing. Congress, with the goal of resolving some of these timing issues, directed the Secretary of Labor in Section 1001 of the Pension Protection Act of 2006 (the “PPA”), to issue regulations (no later than August 2007) clarifying that a DRO that otherwise meets the requirements to be a QDRO will not fail to be treated as a QDRO solely:

• because the DRO is issued after or revises another DRO or QDRO; or
• because of the time at which the DRO is issued.

In addition, the PPA also requires that the regulations clarify that such DROs are subject to all of the same requirements and protections that apply to QDROs, including the provisions of ERISA § 206(d)(3)(H) and Code § 414(p)(7) which contain the procedures for handling the benefits at issue for the period during which the plan administrator is determining whether a DRO is a QDRO.

Interim Final Rule

In response to this Congressional directive, the Department of Labor (the “DOL”) has issued an interim final rule (29 CFR § 2530.206), which primarily consists of examples intended to “provide interpretive guidance by explaining how the statutory language would apply to particular facts.” (Preamble to the interim final rule.) The examples address “subsequent DROs,” “timing,” and “requirements and protections.”

Subsequent DROs: A DRO that otherwise satisfies the QDRO requirements will not fail to be treated as a QDRO solely because the DRO is issued after or revises another DRO or QDRO.

• A subsequent DRO between the same parties:A participant and spouse divorce, and the administrator of the participant’s 401(k) plan receives a DRO that is determined to be a QDRO. Subsequently, before payment under the QDRO has been made or commenced, the parties submit a second DRO that assigns a smaller portion of the participant’s benefit to the former spouse. The second DRO will not fail to be a QDRO solely because the amount assigned under the first DRO has been reduced.
• A subsequent DRO between different parties:A participant and spouse divorce, and a QDRO is submitted to and approved by the plan administrator. The participant then marries and divorces spouse number 2. A second DRO is submitted which assigns to spouse number 2 a portion of participant’s benefits not already assigned to spouse number 1. This second DRO will not fail to be a QDRO solely because it is issued after the earlier DRO pertaining to spouse number 1 which was also determined to be a QDRO.

Timing: A DRO that otherwise satisfies the QDRO requirements will not fail to be treated as a QDRO solely because of the time at which it is issued.

• Orders issued after death:A participant and spouse divorce, and the administrator of the participant’s plan receives a DRO which the administrator determines is not a QDRO. Shortly thereafter, the participant dies while still actively employed. A second DRO, which corrects the previous defects, is submitted to the plan; it will not fail to be a QDRO solely because it is issued after the participant dies.
• Orders issued after divorce:A participant and spouse divorce and the spouse, therefore, no longer meets the definition of “surviving spouse” under the terms of the plan. The parties submit a DRO under which the former spouse is to be treated as the surviving spouse for purposes of receiving the plan’s “surviving spouse” death benefit. The DRO will not fail to be treated as a DRO solely because, at the time the DRO is issued, the former spouse no longer meets the plan’s definition of “surviving spouse.”
• Orders issued after annuity starting date:A participant retires. Spouse waives surviving spousal rights and participant begins receiving benefit payments in the form of a straight life annuity. The participant and spouse subsequently divorce and submit a DRO assigning half of participant’s future benefit payments to spouse. The DRO does not fail to be a QDRO solely because it is issued after the annuity starting date.

Requirements and Protections: Any DRO described under the regulations will be subject to the same requirements and protections that apply to QDROs generally under ERISA and the Code.

• Type or form of benefit:A participant and spouse divorce and their divorce decree provides that spouse is to receive 50% of participant’s 401(k) plan benefits in monthly installments over a period of 10 years. Participant dies while actively employed. A DRO consistent with the divorce decree is submitted to the plan, but the plan does not provide for installment payments. The DRO will not fail to be a QDRO solely because it is issued after the participant dies, but it will fail to be a QDRO because it violates one of the requirements for a QDRO: that a DRO cannot require a plan to provide a type or form of benefit, or any option not otherwise provided under the plan. (Note, however, that based on the example above under “Orders issued after death,” — and putting aside any inconsistency with the divorce decree — it would seem that a second DRO, revised to provide for distribution in a form permitted under the terms of the plan, could be submitted and approved as a QDRO.)
• Segregation of payable benefits:A participant and spouse divorce and submit a DRO to the plan under which payments to the spouse would begin immediately if the DRO is determined to be a QDRO. As required by ERISA and the Code, the plan administrator separately accounts for the amounts covered by the DRO. The DRO is determined not to be a QDRO. After the expiration of the segregation period pertaining to that DRO, a second DRO is submitted under which payments to the spouse would begin immediately if the DRO is determined to be a QDRO. The regulation provides that notwithstanding the expiration of the first segregation period, the amounts covered by the second order must be separately accounted for by the plan administrator for the 18-month period as required under ERISA and the Code.
• Previously assigned benefits:A participant and spouse divorce and submit a DRO assigning a portion of participant’s 401(k) plan benefits to the spouse. The plan administrator determines that the DRO is a QDRO. The participant remarries and then divorces spouse number 2. A DRO is submitted which assigns to spouse number 2 a portion of participant’s benefits already assigned to spouse number 1. The DRO does not fail to be a QDRO solely because the plan administrator has previously approved a QDRO pertaining to spouse number 1, but it does fail to be a QDRO because it violates another QDRO rule: that a DRO will not be a QDRO if it assigns benefits to an alternate payee (here, spouse number 2) that have already been assigned to another alternate payee (here, spouse number 1). (This, too, is a defect that presumably could be corrected in a subsequent DRO.)

Submission of Comments

In the Preamble to the interim final rule, the DOL invites interested persons to submit comments on the interim final rule for consideration by the Department of Labor in developing a final rule. Electronic submissions are preferred and may be submitted to e-ORI@dol.gov, or by using the Federal eRulemaking portal ,a href=”http://www.regulations.gov”>www.regulations.gov (follow instructions for submission of comments). Persons submitting comments electronically are discouraged from submitting paper copies. Comments submitted on paper (preferably three copies) should be sent or delivered to:

Office of Regulations and Interpretations
Employee Benefits Security Administration
Room N-5669
U.S. Department of Labor
200 Constitution Avenue NW
Washington, DC 20210
Attention: QDRO Regulation

All comments will be available to the public, without charge, online at www.regulations.gov and www.dol.gov/ebsa, and at the Public Disclosure Room, Employee Benefits Security Administration, U.S. Department of Labor, Room N-1513, 200 Constitution Avenue NW, Washington, DC 20210.

Dates

Effective date: The interim final rule is effective April 6, 2007.

Comment date: Written comments must be received by May 7, 2007.