Adventures in divorce, private pensions and the DRO, episode 1Posted April 2010. Filed under Property & Financial Matters
When it comes to pensions and divorce, there’s a lot of confusion about how a private pension is divided through the Domestic Relations Order and the Qualified Domestic Relations Order.
Once upon a time, it was virtually impossible for a court to divide the interest in a private pension between two parties. Why? Because of the way the law was written. The Employee Retirement Income Security Act (ERISA) of 1974 made it impossible for any beneficiary or other entity (such as a court) to convey his or her interest in a pension benefit to another person in a way that was binding on the pension plan. Pension plans paid beneficiaries only, nobody else.
In other words, a court could order Harry Band to give half of the marital portion of his benefit to the former Mrs. Mary Band but it had to rely on Mr. Band to write the check on a regular basis. As you might imagine, this led to plenty of litigation.
Then, 1986 legislation said that a pension can be divided through a court order that meets certain, very strict requirements set forth in ERISA. When the plan administrator determines that the order precisely meets those requirements, the plan is then bound by the order—it must send out a check to each of the parties.
The order sent to the plan for review is called a Domestic Relations Order. And, as you probably have guessed, when that order is determined to have met the requirements, it becomes a Qualified Domestic Relations Order—otherwise known as a QDRO—and its terms are put into effect. The plan sends out two checks, as specified.
Sounds fairly easy. But DROs tend to be minefields of misunderstanding and error—mostly honest. In future episodes, I’ll try to point out and clear up some of the confusions.