03 Nov Six Valid Reasons to Reject a Domestic Relations Order
With the U.S. divorce rate in the 40 to 50 percent range, your retirement plan is likely to receive a domestic relations order. These orders entitle an ‘alternate payee’ to a portion of a participant’s retirement benefits.
It is up to you, the plan sponsor or administrator, to determine whether the order is qualified, making it a qualified domestic relations order. Although domestic relations orders are typically issued by a state authority, you can still reject one if it does not comply with your plan’s terms. Here are six valid reasons to do so:
- Inaccurate details. Sloppily drafted domestic relations orders may identify your retirement plan incorrectly, such as by naming the custodian instead of the plan by its legal name.
- Inappropriate form of requested payment. This could occur, for example, if you have a defined benefit plan that does not allow for lump-sum distributions but the order calls for one.
- Distribution timing issue. The order might request an immediate distribution, but your plan might allow distributions to occur only when the participant reaches retirement age.
- Valuation timing issue. Suppose your defined contribution plan allows for the valuation of a participant’s vested benefits only on a quarterly basis. If the order calls for an immediate valuation of benefits so that a stipulated proportion (for example, 50 percent) of assets ultimately can be distributed to the alternate payee, you can reject the order.
- Fluctuations in asset values. If the order does not address an increase or decrease in the value of plan assets between the order’s date and the date of distribution, this could lead to subsequent confusion and disputes.
- Addressing the prospect of premature death of an alternate payee. Your plan document might require that the order specify the implications of the death of an alternate payee before paying the retirement benefit. Thus, to be qualified, an order might, for example, stipulate that the benefit be payable to the deceased alternate payee’s estate.
Should you need to reject a domestic relations order, work closely with your professional advisors to follow the applicable rules to issue the required formal notice. Remember, a rejection is not likely the end of the matter; whoever drafted the domestic relations order will probably resubmit it. We can advise you on cost-efficient ways to manage your plan.