Techniques to Streamline Administration

Adopt Default Criteria

Default criteria can translate into thousands of dollars of savings per year in the review of QDROs. Many QDROs are silent on certain issues that affect the administration of the QDRO. Over time, a plan administrator begins to get a feel for just how often QDROs exclude the same issues.

For example, many QDROs for 401(k) plans simply provide the alternate payee with a specified dollar amount or a percentage of the participant's total account balance but do not state from which funds the amount is to be derived. In other words, the QDRO may be silent on the issue of allocation of benefits. You should establish a default criteria in your QDRO Compliance Manual providing that any QDRO that is silent on the issue of allocation of benefits will be allocated on a pro rata basis among all of the participant's accounts. In this manner, you do not have to reject a QDRO that is silent on this issue.

Likewise, does the 401(k) QDRO include language that provides the alternate payee with interest and investment gains/losses on her share of the account balance from the effective date of assignment to the date of distribution? As a plan administrator, you should adopt default criteria whereby an alternate payee will receive investment gains/losses on her assigned share of the benefits automatically if the QDRO is silent on this issue. The approval letter to the parties should clarify any default assumptions made by the plan administrator, however. This would provide the parties with an opportunity to submit an amended QDRO, if necessary, in the event the parties actually intended to freeze the alternate payee's assignment retroactive to the date of divorce.

With respect to your defined contribution plan QDRO administration, you may want to establish default criteria on the following issues:

With respect to your defined benefit pension plans, you should consider adopting default criteria on the following issues:

Permit Parties to Submit Clarifying Letters

You may be able to save time and expense by permitting the parties and their attorneys to submit clarifying letters rather than forcing them to obtain an amended QDRO. For example, assume that the QDRO would qualify except for the fact that the participant's address was left out. Or perhaps the QDRO included an incorrect social security number for the alternate payee. There have been cases where the plan administrator has forced the parties to obtain a brand-new, amended certified QDRO to correct these admittedly minor and nonsubstantive errors. Upon receipt of the amended order, the plan administrator would almost treat it as if it were the original QDRO. It would send out new acknowledgment letters stating that the newly amended QDRO is under review, then distribute letters to the parties indicating the outcome of their review.

If the QDRO contains a minor error, simply permit the parties to submit a clarifying letter to clear up these mistakes. You should require each party to sign the letter, and you may even want them to get it notarized. This is certainly easier for all involved, including the plan administrator. When the clarifying letter is received, simply attach it to the QDRO.

Permit Immediate Distributions for 401(k) QDROs

If you haven't already done so, you should consider amending your defined contribution plan to permit immediate lump-sum payments for alternate payees once the defined contribution QDRO is approved. Even if the participant is not yet eligible for a distribution, administrators are permitted to offer alternate payees a cash-out of their interest in the plan. Some plan administrators take this one step further, forcing a distribution on the alternate payee once the QDRO is approved rather than simply allowing an election. Of course, they would also allow the alternate payee to direct a rollover rather than receive the cash, but in any event, the alternate payee is not permitted to maintain her accounts under the plan once the QDRO is approved. Although this force-out is an extreme approach, so far the IRS has not disqualified any plans on this basis. We say "extreme," because alternate payees should generally be permitted to elect any form of benefit option available to employees including the right to keep the funds in the plan indefinitely to accrue further investment gains.

It is certainly feasible to permit alternate payees to elect an immediate distribution or rollover once the QDRO is approved. In this manner, the plan administrator need not maintain records for these alternate payees over the next 10 or 20 years. Rather than forcing alternative payees out of the plan automatically upon approval of the QDRO, it may be preferable to allow alternate payees to elect an immediate distribution. Most alternate payees do opt for the immediate cash-out.

Eliminate Acceptance of Retroactive Dates of Assignment

It's also not uncommon to receive a QDRO today for a divorce that occurred ten years ago. These QDROs invariably provide investment gains/losses for the alternate payee from the date of divorce to the date of distribution. Some plan administrators actually spend hours or even days trying to track growth over the last several years. Now that many 401(k) plans offer multiple investment funds and the ability for employees to change their investment mix on a daily basis, the problem of tracking gains has become much more complicated.

Some plan administrators are putting the burden back onto the attorneys who forget to draft the QDRO at the time of divorce. They will not accept a QDRO that includes a retroactive date of assignment. The plan will accept a QDRO only if it includes a fixed-dollar amount or a percentage of the participant's current account balance. An acceptable QDRO in this case would provide the alternate payee with "50 percent of the participant's total account balance as of the segregation date."

While there is nothing prohibiting a plan administrator from eliminating retroactive dates of assignment altogether, experience has taught that this approach is rather drastic and can end up causing more problems than it's worth. First of all, the attorney becomes irate because he or she is at loss what to do next. They have no idea what the fund(s) earned from the date of divorce to the present. If you decide to adopt this approach, you can ease the burden on the attorney by at least letting him or her know what the annualized rates of growth by fund were for the last several years. This should be relatively easy for the plan to prepare. Once the growth chart is completed, it need be updated only once per year. In this manner, the attorney will have information that can help in the negotiation of an agreed-upon rate of return with opposing counsel.

Adopt a Restriction Date for Your Plan

Not permitting any retroactive assignment dates in QDROs can place an extra burden on the plan administrator. Plan administrators should adopt a Restriction Date that represents the earliest date that a plan administrator could obtain old account balance information and then track investment gains/losses. The plan administrator would then only honor a QDRO that included an assignment date that was on or after the Restriction Date.

Some plan administrators have adopted rolling restriction dates. In other words, they may have a two-year rolling date, whereby they would only honor a QDRO if it included an assignment date that was not more than two years previous to the date the QDRO was submitted for review.

In summary, the plan administrator should consider modifying the company's approach regarding retroactive dates of assignment if they are too much of a burden to administer. However, the plan administrator should think twice before implementing the more extreme approach of the total elimination of any retroactive dates of assignment.

Provide ERISA Appeal Rights

All plan participants and beneficiaries covered under ERISA-governed plans have federal appeal rights when their benefits are in dispute. Likewise, because alternate payees have the standing of a plan beneficiary, they too should have appeal rights when the terms of the QDRO are in question. This is another reason for preparing Interpretation Letters when the QDRO is approved. These documents not only set forth the rights and entitlements of the alternate payee, but also provide the parties an opportunity to appeal the QDRO interpretation.

Implementing an appeal process into your QDRO administration can actually help limit the company's liability exposure and also introduce finality into a particular QDRO case once the appeal period expires.

Should one of the parties exercise his or her appeal rights by disputing the plan administrator's interpretation of the QDRO, you should promptly address the appeal. If a delay occurs, the administrator runs the risk of distributing the wrong amount to the alternate payee. The plan administrator should immediately place a secondary freeze on the participant's benefits or account balance, as applicable, and then provide the parties with an extension to submit an amended QDRO. The secondary freeze period should be of relatively short duration—two or three months. This forces the parties to submit an amended QDRO while the issues are still fresh in their minds and while each party is still represented by counsel. You should make it clear to the parties that, should they fail to submit an amended QDRO within the allotted time period, the previously approved QDRO will be administered in accordance with the terms of the initial Interpretation Letter.