In a Texas divorce, one of the major assets to address in a property division include retirement accounts, such as a 401k or defined benefit pension plan. Retirement assets within a private employer’s retirement plan are typically governed by ERISA. ERISA, the Employee Retirement Income Security Act of 1974, establishes particular processes for dividing assets held in a retirement plan in a divorce. This process is performed by a qualified domestic relations order or QDRO.
ERISA requires retirement plan assets divided through a special court order called a domestic relations order, or DRO. A DRO is an order issued by the court after finalizing the divorce that instructs the plan administrator how to divide the plan assets according to the property division included in the divorce decree. (A DRO can also satisfy payment of spousal support or child support.)
ERISA and QDRO requirements in a Texas divorce
Because the retirement plans are governed by ERISA, which is a federal law, it creates a unique and rare exception in the law where a private party can reject a court order as invalid. ERISA requires a DRO to be qualified by the plan administrator before division of the retirement assets can occur. This is how a DRO earns its Q and becomes a QDRO. If the plan administrator cannot qualify the DRO then he or she must reject the court order and not divide the assets. Qualification of a DRO means that the DRO conforms to the requirements set out in ERISA (and accompanying DOL guidelines) and the plan’s ERISA-governed rules on division of plan assets (known as segregation) pursuant to a DRO.
Qualification can be a lengthy process. ERISA permits qualification to take up to eighteen months. It is rare for a plan administrator to require that length of time but in certain circumstances it may be necessary, such as locating old employment records to perform pension benefit calculations or legal analysis of a unique DRO. The more common reason for delay in qualification is rejecting a DRO that cannot be qualified. Once a DRO is rejected, a corrected order must be prepared, signed by the court and resubmitted to the plan. Then the qualification process starts over. For that reason, it is important that the DRO language conforms to the plan’s requirements on the first submission.
Elements of QDRO qualification
To gain qualification a DRO must meet four basic elements: (1) it must maintain the tax-deferred status of plan assets; (2) it must meet the state’s domestic relations law; (3) it must conform to plan rules; and (4) it must clearly describe the formula for determining the recipient’s share of the assets. (There are also procedural requirements, such as the identification of both the plan participant and alternate payee/recipient.) The key qualification issues almost always come under the last two elements. The fourth element is actually a plan rule itself; but it is important enough to consider an independent requirement for the DRO.
Common ways DROs violate these latter elements include: not clearly explaining the formula to divide the account; dividing the account in a manner that the plan cannot follow; requiring distribution of the recipient’s share of the participant’s assets in a manner not permitted by the plan; and requiring the plan to implement some investment option outside of the plan. Often these qualification problems occur with defined benefit pension plans. Defined contribution plans, such as 401k plans, are easier to divide so qualification problems are less common.