How a defined benefit QDRO works: Dallas QDRO lawyer
I have written frequently about QDROs on my blog this year because, in my experience working with 401k and pension plans, there are a lot of misconceptions about QDROs in a Texas divorce under our community property rules. (You can read more about QDROs on the main QDRO page, and several posts including this one, this one, this one, this one, this one, and don’t forget this one.)
401k QDROs are easy because the assets are more easily tracked and divided. Typically a QDRO on a 401k plan will divide the marital portion in two halves or carve out a amount. In a defined benefit pension plan, the QDRO is more complicated and more limited.
ERISA and QDROs in Texas
In a defined benefit pension plan, the employer (or other plan sponsor) offers the employee a benefit calculated on the basis of an established formula that computes years of service, pay and other factors into a benefit due at a certain age and in certain forms of payment. The employer must pay that benefit under the formula when the employee becomes eligible for benefits.
ERISA, the federal law governing pensions, requires plan sponsors to fund a portion of benefits due in a separate trust; however, there is no account balance specific to any employee or retiree to draw out and divide.
Differences between QDROs for 401k and pension plans
One key difference is the plan formula can include future benefits that relate back to the marital portion. For example, some pension plans give cost of living adjustments or early retirement incentives. If that is the case then the QDRO should speak to whether the alternate payee (the non-employee spouse receiving part of the pension benefit) should receive a portion of those potential future increases. For that reason, a QDRO on a pension should be carefully and technically drafted to account for future benefit increases.
Segregating assets under a Texas QDRO
After segregating a benefit the alternate payee will become eligible to receive his or her portion of the benefit based upon the plan’s distribution rules and the terms of the QDRO. Some plans will permit the alternate payee to take immediate payment in either a monthly annuity payment or in a single lump sum, even if the employee continues working or can receive payments at this time. On the other hand, some plans require the alternate payee to wait to receive benefits until the employee becomes eligible.
Sometimes the plan rules will permit the alternate payee to receive payments immediately but the QDRO restrains the alternate payee from taking payment until a later date. Usually that occurs from the use of bad form language in the DRO or misunderstanding the plan rules. A lump sum payment may issue from the pension plan if the plan permits lump sum payments. Not all plans do. That often comes as a bitter surprise for alternate payees.
The domestic relations order (DRO) for a defined benefit pension can be very complex and technical. Especially when drafted to provide the alternate payee the maximum benefit he or she could receive under the plan. If the DRO does not sync up with the plan rules then the plan administrator cannot qualify the DRO. Then the alternate payee cannot receive his or her share of the benefits.
This can result in added cost and wasted time for the alternate payee. It typically requires drafting a new DRO, going back to court for approval and resubmitting it to the plan.
Talk to a Fort Worth QDRO lawyer
Contact my office today to discuss your QDRO needs. Problems with QDROs often become complicated problems for everybody. Even with the help of divorce lawyers it can be incredibly difficult to sort out these problems and correct the issue moving forward. QDRO issues often involve both Texas family law as well as federal law. This difficult intersection of law can cause confusion and complication. You can make your life easier working with a divorce lawyer who understands both areas of law.