§35.01 Introduction

• Jurisdiction: Washington

§ 35.01 INTRODUCTION

The benefits held in a "qualified plan" often constitute a significant percentage of the assets of an individual and his or her spouse, and they must satisfy the anti-assignment and alienation requirements of the Internal Revenue Code (I.R.C. or Code), I.R.C. § 401(a)(13), and the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1056(d). Treasury Regulations followed by the Internal Revenue Service (IRS) indicate that the terms "assignment" and "alienation" include "[a]ny direct or indirect arrangement (whether revocable or irrevocable) whereby a party acquires from a participant or beneficiary a right or interest enforceable against the plan in, or to, all or any part of a plan benefit payment which is, or may become payable to the participant or beneficiary." Treas. Reg. § 1.401(a)-13(c)(1)(ii).

The regulations also provide for specific situations in which an impermissible assignment or alienation will not be deemed to occur—such as an assignment that is voluntary and revocable when made, and which does not exceed 10 percent of the benefit payment due to the participant or beneficiary.

Prior to the Retirement Equity Act of 1984 (REA), neither the Code nor ERISA specifically authorized plan distributions in conjunction with a separation or divorce. However, both the courts and the IRS had previously carved out exceptions to the anti-assignment and alienation rules in the domestic relations area. For example, in Stone v. Stone, 632 F.2d 740 (9th Cir. 1980), cert. denied, 453 U.S. 922 (1981), the Ninth Circuit held that ERISA was not intended to preempt community property laws, and that an order issued by a court that requires a division of retirement benefits would not violate the anti-assignment provisions. Previously, in Francis v. United Technologies Corp., 458 F. Supp. 84 (N.D. Cal. 1978), the court held that ERISA's preemption provisions prevent the application of state community property laws permitting attachment of plan benefits for family support purposes. Courts throughout the federal circuits were hopelessly in conflict on the issue of dividing pension benefits. See, e.g., Cartledge v. Miller, 457 F. Supp. 1146 (S.D.N.Y. 1978).

In light of the changing climate, as reflected in decisions such as Stone, the IRS issued a ruling in 1980 that a qualified plan would not lose its "tax qualification" under I.R.C. § 401(a) solely because the plan complied with a court order requiring the distribution of benefits of a participant in pay status to the participant's spouse or children in order to meet the participant's alimony or support obligations. Rev. Rul. 80-27, 1980-1 C.B. 85. However, this left open the question of dividing plan benefits under circumstances in which the participant was not in pay status. See also S. Rep. No. 98-575, 98th Cong., 2d Sess. 1984, Pub. L. No. 98-397, reprinted in 1984 U.S.C.C.A.N. 2547, 2564-65.

To resolve the dilemma between applying the anti-assignment provisions of the Code, while honoring state court orders attempting to provide protection to former spouses and children in domestic relations disputes, the Retirement Equity Act of 1984 (REA) created an exception to the anti-assignment provisions, as well as the preemption provisions of ERISA for a qualified domestic relations order (QDRO), effective as of January 1, 1985. See I.R.C. §§ 401(a)(13)(B), 414(p); 29 U.S.C. §§ 1056(d)(3), 1144(b)(7). Since the enactment of REA, the QDRO provisions have been clarified from time to time, by Congress, the courts, the IRS, and the Department of Labor. For example, the Tax Reform Act of 1986 (TRA 1986), Pub. L. No. 99-514, 100 Stat. 2085 (Oct. 22, 1986), amended the Code to provide that an alternate payee will be treated as the distributee and taxable on the receipt of benefits only if the alternate payee is the spouse or former spouse of the participant. I.R.C. § 402(a)(9) (as amended by § 1898(c)(1)(A) of TRA 1986). Subsequently, IRS Notice 97-11, 1997-1 C.B. 379, provided sample language for QDROs. The Pension Benefit Guaranty Corporation (PBGC) has also published several articles that discuss the QDRO rules with respect to certain plans that are terminated and administered by the PBGC. See PENSION BENEFIT GUAR. CORP., QUALIFIED DOMESTIC RELATIONS ORDERS AND PBGC, https://www.pbgc.gov/wr/benefits/qdro (last visited Aug. 3, 2021). To reach PBGC by phone, call (800) 400-7242 or (202) 229-4047.

The former U.S. Department of Labor (DOL) division commonly referred to as the Pension and Welfare Benefits Administration (PWBA) is now known as the Employee Benefits Security Administration (EBSA). Its QDRO publication is available online as well. See U.S. DEP'T OF LABOR, EMP. BENEFITS SEC. ADMIN., QDROs, THE DIVISION OF RETIREMENT BENEFITS THROUGH QUALIFIED DOMESTIC RELATIONS ORDERS (2020) (hereinafter DOL QDRO Pub.), https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/qdros.pdf.

The DOL has jurisdiction to interpret the QDRO provisions of ERISA and the Code except to the extent provided in I.R.C. § 401(n). The Secretary of the Treasury has jurisdiction, pursuant to I.R.C. § 401(n), to issue regulations to coordinate the QDRO provisions under the Code and ERISA. To date, only minimal guidance under Treas. Reg. § 1.401(a)-13 has been issued.

[1] Plans Subject to the QDRO Rules

The Code and ERISA contain substantially identical rules concerning QDROs. However, certain distinctions exist under the Code and ERISA regarding the types of plans to which the rules apply and the consequences of failure to comply.

[a] The Code

Under the Code, all tax-qualified profit sharing plans, money pension purchase plans, stock bonus plans, 401(k) plans, employee stock ownership plans (ESOPs), and defined benefit plans covered by I.R.C. § 401(a) are subject to the QDRO rules. I.R.C. § 414(p)(9); Treas. Reg. § 1.401(a)-13(a). If a domestic relations order is determined to be a QDRO, the anti-assignment provisions do not apply, and the retirement benefit may be assigned in accordance with the terms and conditions stated in the QDRO. Tax-shelter annuity programs (I.R.C. § 403(b) plans) are also subject to the QDRO provisions. I.R.C. § 414(p)(9). However, I.R.C. § 403(b) plans funded solely through employee "salary deferrals" are not typically subject to ERISA. 29 C.F.R. § 2510.3-2(f).

I.R.C. § 414(p)(11) makes the QDRO provisions applicable to "governmental plans," nonelecting "church plans," and I.R.C. § 457 plans, even though these plans generally are not subject to the anti-assignment rule under I.R.C. § 401(a)(13). See also Chapter 6.15 RCW for state law protections against creditor claims when ERISA does not apply. The rationale is to make applicable the tax consequences for benefits distributed under a QDRO. As a result, only the requirements of I.R.C. § 414(p)(1)(A)(i) must be satisfied—i.e., the domestic relations order (DRO) must recognize the existence of the alternate payee's right, or assign to an alternate payee the right, to receive all or a portion of the participant's plan benefits. However, practically speaking, the DRO must also contain sufficient information to be able to...