Property Settlement Qdros and Money Purchase Plans

• Publication year: 1991
• Pages: 2077
• Citation: Vol. 10 No. 1991 Pg. 2077

20 Colo.Law. 2077 Colorado Lawyer 1991.

1991, October, Pg. 2077. Property Settlement QDROs and Money Purchase Plans

Property Settlement "QDROs" and Money Purchase Plans

by Claybourne Murray Douglas

When married couples divorce, the court must divide marital property, including vested rights under any pension or retirement plans.(fn1) As couples search for liquid assets to "settle up," they frequently seek to liquidate their accounts in employer-sponsored denned contribution ("money purchase") retirement plans. Often, these efforts result in a qualified domestic relations order ("QDRO") served on the employer or plan trustee.

Most such plans restrict the conditions under which member employees can withdraw contributions, although they frequently except QDROs. In addition, a Colorado "spendthrift" statute restricts "execution, levy, attachment, garnishment, or other legal process" against the "monies, funds, annuities, individual accounts, or other benefits" of retirement plans of a municipality.(fn2) This article explores the issue of whether a city can honor a court order to withdraw an employee's money purchase plan contributions for a domestic relations property settlement, notwithstanding plan document or statutory limitations.

QDRO Exception to Spendthrift Requirements

Internal Revenue Code ("Code") § 401 [26 U.S.C. § 401(a)] provides that "qualified" retirement plans are not subject to federal income tax on contributions or accumulations until distribution of benefits. Code § 401(a)(13) states, in pertinent part:

(A) ASSIGNMENT AND ALIENATION IN GENERAL---A trust shall not constitute a qualified trust under this section unless the Plan of which such trust is a part provides that benefits under the Plan may not be assigned or alienated----

(B) SPECIAL RULES FOR DOMESTIC RELATIONS ORDERS ... sub-paragraph (A) shall not apply if the [domestic relations] order is determined to be a qualified domestic relations order.

Thus, qualified tax exempt retirement plans must prohibit assignment or alienation of benefits, except under QDROs

However, this spendthrift requirement and the QDRO exception do not apply to a city's money purchase plan. Code § 401(a)(30) states that § 401(a) (13) "shall apply only in the case of a plan to which § 411 [relating to minimum vesting standards] applies..." Code § 411(e)(l)(A) states that the minimum vesting standards "shall not apply" to a "governmental plan." A city's money purchase plan is a governmental plan.(fn3) Therefore, Code § 401(a)(13) (inalienability of benefits and the QDRO exception) is inapplicable.(fn4)

Typical Plan Document

The typical city's money purchase plan states that (1) it is intended to meet the requirements of Code §§ 401(a) and 501(a) (tax exemptions for a qualified retirement plan) and to provide retirement income to employees; (2) benefits, prospective benefits or any other rights or interests under the plan cannot be transferred by the member; and (3) benefits are not subject to the claims of creditors or are not liable to attachment, execution or other legal process. It also may contain a QDRO exception to the prohibition against transfer or...