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May 2009Using QDROs to Collect Child-Support Paymentsby Kim Schnuelle and Lisa Dufour Even a cursory glance at the morning paper provides a clear image of the mounting financial crisis in this country. As the economy has worsened, many people are finding it more and more difficult to pay their debts. When such financial hardships result in a failure or unwillingness to meet maintenance and child-support obligations, the result can be devastating to children. In these circumstances, employment retirement funds or pensions can be a good source for collection of overdue child-support and maintenance obligations. Through the use of a Qualified Domestic Relations Order (QDRO), a spouse, former spouse, child, or other dependent[1] of an employee or former employee who is a participant in an employee-benefit plan may be able to collect up to 100 percent of all debt owed. In addition, via ordered distribution of an obligor's monthly paid benefits, a QDRO can assure timely and consistent support payments until all minor children emancipate. Although there is a common perception that QDROs are difficult to put in place, in reality the procedure is fairly simple and straightforward. In fact, QDROs can be a useful tool for collection of child support from large employers such as the NBA, the NFL, Boeing, and numerous professional unions. In this article, we will provide both a general overview of what QDROs can and cannot do as a collection tool, as well as practical tips to streamline the process for the busy family law practitioner.[2] Qualified Domestic Relations Orders are governed by two separate federal statutes: Section 414(p) of the Internal Revenue Code and Section 206(d) of ERISA.[3] Although broad in scope, QDROs have several significant limitations. Prior to using one, a practitioner should analyze whether it would be an effective collection tool. For example, QDROs are available only for privately sponsored employee-benefit plans.[4] Thus, a QDRO is ineffective against a government- or church-sponsored retirement plan.[5] In addition, a QDRO can obtain funds only in a time and manner which the plan participant/obligor could obtain them.[6] Plan benefits may be paid to the plan participant at the beginning of the participant's "earliest retirement age," defined as the earlier of 1) the date when the participant is entitled to distribution under the individual plan; or 2) the later of either the date the participant turns 50 or the earliest date the participant could have obtained benefits if he or she left employment.[7] A QDRO cannot force a participant to take early retirement but can seize any pre-retirement benefits to which the obligor is entitled.[8] Also, a QDRO is limited by the specific types of distribution options authorized in the debtor's plan. The QDRO cannot require payment via an option not allowed under the plan.[9] Finally, if benefit rights have been assigned in a prior QDRO that is legally valid, they cannot be reassigned by a subsequent QDRO.[10] After considering these limitations, a QDRO may still be an attractive option to collect outstanding support and maintenance debts and/or ensure monthly support payments. A QDRO may be beneficial even if the obligor/plan participant is some years from earliest distribution, because the entry of a QDRO would effectively prevent the participant from either cashing in the benefits through early retirement or assigning them to another individual. A QDRO can also segregate or freeze benefits. This gives the alternate payee some control over the benefits, even if the funds cannot be distributed until a later date. In deciding to pursue a QDRO, the family law practitioner must first obtain all necessary plan information prior to drafting the motion and proposed order. If the obligee knows the name of the employer, it is often possible to simply telephone the employer or the plan administrator[11] and find out the specific benefit plan name. One can also frequently obtain this information through an active Internet search. One should then ask the plan administrator to mail a copy of the plan guidelines. These guidelines usually prove very helpful in aligning a proposed QDRO to the exact specifications of the individual plan. In addition, larger employers such as Boeing often have approved model QDROs which they will provide upon request. If such a model order is available, the family law practitioner can then input the facts of their specific case into the standard form for simple approval by the plan. However, it is important to note that employers often provide several different benefit plans. To avoid further litigation, an effective QDRO should include the specific name of the plan(s) in which the participant/obligor has an interest. Once the specific name of the plan or plans is ascertained, the family law practitioner should determine the type of retirement/pension plan used by the employer. Retirement/pension plans come in two basic forms: defined benefit plans and defined contribution plans.[12] Under a defined benefit plan, a specific retirement benefit is established and the employer makes an annual contribution to the plan. In such a plan, the amount of a participant's accrued benefits is usually listed in terms of a monthly or annual benefit (e.g., $1,500 per month, $35,000 per year, etc.). Such plans are typically found with larger employers, with the most common type being the traditional pension plan. In dealing with a defined benefit plan, a QDRO should order a monthly benefit payout and not a lump-sum payment. Under a defined contribution plan, the employer pays a fixed or determinable amount to the plan each year, paid into individual accounts established for each employee. The plan does not guarantee a specific benefit to any employee. In such a plan, the amount of a participant's benefits is listed in terms of a total lump-sum balance (e.g., $100,000). Another name for a defined contribution plan is an individual account plan. Specific examples of such plans include 401(k) plans and profit-sharing plans. In dealing with a defined contribution plan, a QDRO should order a lump-sum distribution of funds rather than a regular monthly payment. Every QDRO must contain several specific provisions mandated under ERISA and the Internal Revenue Code in order to be approved by the plan administrator. First, the QDRO must be an order, judgment, or decree entered pursuant to a domestic-relations or community-property action.[13] Although the QDRO is usually prepared as a separate document for clarity purposes, this is not a requirement under the statutes. Second, the QDRO must concern the division of marital property and maintenance or child support owed to a spouse, former spouse, child, child's legal guardian, or a legal dependent of the plan participant.[14] Third, the order must list and recognize the right of the obligee/alternate payee to receive either all plan funds due to the participant or a defined portion of the participant's owed plan benefits.[15] Fourth, the QDRO must clearly set forth the following information: a) the full name and mailing address of the participant; b) the full name and mailing address of each alternate payee[16]; c) a clear listing of the amount or percentage of the participant's benefits to be paid under the plan to each alternate payee; d) the number of payments or period to which the order applies; and e) the full and correct plan name or names.[17] In drafting a QDRO, the practitioner must consider the income-tax liability for the benefits. If funds contributed to the plan directly from the employee were taxed before contribution, they are not taxable upon distribution.[18] Funds contributed by employers are taxable upon distribution in the same manner as other general income.[19] Under federal law, child-support payments are not taxable to the payee parent.[20] However, if the alternate payee in the QDRO order is a spouse or former spouse, the benefits paid are included as taxable gross income of the alternate payee.[21] The alternate payee spouse or former spouse may be able to defer this immediate tax penalty if they roll over a lump-sum payment to an IRA or other qualified retirement fund.[22] In a paternity case, the child or dependent must be listed as the alternate payee, as there is no spouse, and tax liability will be assessed against the obligor. The QDRO should recognize the tax liability of the recipient and credit only the portion of the funds that remain after taxes are paid as payment received. As previously mentioned, it is the plan administrator who determines whether a QDRO is a valid order. Thus, a QDRO entered by a court which does not fully meet the plan specifications as determined by the individual plan administrator will not qualify, and no funds will be disbursed. In such a case, the practitioner will have to draft a new motion and proposed order. If the plan does not have a model QDRO order, the family law practitioner should request a copy of the plan's QDRO guidelines and tailor the proposed order accordingly. It is prudent to send the plan administrator a copy of your proposed order well in advance of the court date with a cover letter asking, in the opinion of the plan administrator, if the proposed order will meet all qualifications. Through this advance planning and communication with the plan administrator, you will significantly increase the chances of your final QDRO order being approved by the plan administrator. Once the final QDRO order is signed by the court, the plan administrator has a reasonable period to determine whether the QDRO complies with ERISA and the individual plan requirements.[23] Although the term "reasonable period" is not statutorily defined, many employer plans have adopted procedures governing determination timelines. Federal statutes require plan administrators to segregate and separately account for any funds payable to an alternate payee for an 18-month period. This period begins on the date of the first benefit payment required under the QDRO, following receipt of the certified QDRO by the plan administrator.[24] In practice, the time needed to have a QDRO approved by the plan administrator depends upon the size of the employer, the type and complexity of the employer plan itself, and the clarity of language in the QDRO order. Although QDROs are not available in all situations, where they are available, they are an invaluable collection tool. In any case involving unpaid maintenance and support, it is worth investigating whether the obligor has any available retirement or pension benefits. If so, filing a QDRO may be the best method available to assure the financial stability of the client's family. If the client has assigned his support collection rights to the Department of Social and Health Services through the Washington State Support Registry (WSSR), state attorneys may, depending upon the circumstances of the individual case, file a QDRO action as part of a support collection action. If a client has an open case with DSHS, the family law practitioner may want to explore the option of a state-filed QDRO to reduce costs. However, a state-filed QDRO may take longer to complete than a privately filed case. Therefore, if time is of the essence, it is often preferable to file a private action immediately. In either scenario, however, a QDRO may be the quickest, simplest, and most effective method to ensure both full payment of outstanding support and maintenance debt, and secure timely distribution of monthly child-support obligations. Kim Schnuelle is a senior deputy prosecuting attorney in the King County Prosecutor's Office Family Support Division. Currently, she is assigned to the paternity establishment unit of the Seattle office. She can be reached at kim.schnuelle@kingcounty.gov. Lisa Dufour is a senior deputy prosecuting attorney in the King County Prosecuting Attorney's Office Family Support Division. Currently, she is head of the Special Collections Unit. She can be reached at lisa.dufour@kingcounty.gov. NOTES |
