Does A Qdro Count As In-service Distribution For Top Heavy

How Does a Participant'due south Divorce Affect our 401(grand) Plan?

Facts

One of the participants in our 401(k) programme is going through a divorce, and nosotros simply received a court gild directing us to provide a portion of his account to his ex-spouse. I idea that retirement plan accounts had special protection against legal judgments.

Question

Are we supposed to act on this courtroom social club? If then, what are we supposed to do?

Answer

For starters, you lot are right that retirement plans enjoy special protections confronting creditors and legal judgments; however, at that place is a very narrow exception that tin can come into play in domestic relations situations, primarily divorce proceedings.

The order that you received is almost likely what is called a Domestic Relations Order (DRO). If a DRO meets certain requirements, it becomes a Qualified DRO or QDRO and is a machinery the courts can utilise to divide martial property as part of divorce proceedings.

In order to exist qualified, a DRO must include the following information:

Name of the plan to which the gild relates,
Name of the participant,
Proper noun of the alternate payee (the person receiving the benefits from the participant),
Amount of the laurels (either every bit a dollar amount or formula such as a percentage of the participant's account balance every bit of a certain date), and
Specific notation that the lodge is issued pursuant to state domestic relations laws.

The DRO cannot provide a greater amount than what the participant is entitled to receive, and it cannot conflict with plan provisions regarding the mode in which the benefit is paid. For case, if the plan does not permit annuity payments, the DRO cannot honor an annuity to the alternating payee.

All plans are required to have written procedures for processing QDROs, and so it is important to familiarize yourself with your plan's specific requirements before taking action. With that said, here are the general steps involved.

Freeze the participant's business relationship for distribution and loan transactions. This is to ensure the participant doesn't take his/her money and run equally a style to prevent the one-time spouse from receiving anything.
Notify the participant and alternate payee that either you have received or expect to receive a DRO and have frozen the account appropriately.
Review the content and details of the DRO to confirm that information technology includes the necessary data to exist qualified.
Notify the participant and alternating payee that either the DRO is a Qualified DRO (QDRO) or provide details of any necessary revisions.
Upon determining the DRO is qualified, work with your recordkeeper to split the business relationship as directed past the QDRO.

It is important to note that courts tend to enforce QDROs exactly as they are written. That means it is critical non to effort to read between the lines to infer what is contemplated. Ane instance might be an order that awards l% of the participant's account residuum equally of the first 24-hour interval of the yr. If the order is not processed until, say, October 1^st of that yr, it might exist tempting to adjust the award for any investment changes during the intervening nine months. However, unless the lodge specifically calls for an earnings adjustment, that should non be washed.

Once the business relationship has been split, the alternate payee is essentially treated the aforementioned fashion every bit a onetime participant who withal has a balance in the program. If the balance is more $5,000, the alternate payee can go on his or her business relationship in the plan. Conversely, if the residuum is below $five,000 (or whatever your program's mandatory distribution threshold is), you can forcefulness him/her to take a distribution afterward providing the requisite notices. Speaking of notices, as long as the alternate payee's balance remains in the plan, s/he must keep to receive all of the same notices that other former employees with balances receive, including the Summary Annual Report, fee disclosures, and whatsoever blackout notices that might apply.

Seeing a court club related to a participant'southward divorce state on your desk or in your inbox can be a bit unsettling. Withal, equally long as you follow the terms of the order and your plan's QDRO policy carefully, they can more often than not be dealt with quickly and easily. Of course, if you have questions, pick up the phone and call your friends here at DWC. We can aid y'all work through any questions you might have.

For more information on QDROs, please visit our Cognition Eye here and here.

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