Benefits Basics – When an Employee Gets Divorced: A Resource Guide for HR & Benefits Professionals
While , over 1.8 million Americans still divorce each year. Divorce is one of the most your employees may face, affecting not only their home life, but potentially causing significant changes or disruptions at work. When an employee announces that they are getting divorced, your human resources (HR) and employee benefits teams must work together to assess how the divorce may affect the employee’s beneficiary designations, retirement benefits, group health coverage, and overall well-being.
This guide provides a high-level reference resource, in a plan-by-plan format, on how to approach each benefit arrangement when an employee gets divorced, and offers up some practical tips on employee benefits issues that may arise as you manage your company’s response to an employee’s divorce.
The information given in this guide is general in nature and is not intended to address every benefit or tax issue that may come up when dealing with the divorce of an employee or other nuances that may arise when considering the impact of an employee’s divorce on your company’s benefit plans. In addition, any tax or other rules described in this guide are current as of the date of this guide, and do not infer that the rules described in this guide are the only rules (tax or otherwise) that may apply and are subject to change. As a result, we always recommend that you engage your in-house or external legal counsel or other tax or employee benefits advisors when working through compensation and benefits issues related to an employee’s divorce.
This guide is part of 鶹ֱ’s Employee Benefits & Executive Compensation Practice “Benefits Basics” resource series – please see our other resource guides for important benefits considerations when an employee dies, becomes disabled, or is dismissed.
AN OVERVIEW OF RELEVANT LAW
Before we discuss the impact of an employee’s divorce on the administration of your company’s compensation and benefit plans, it is important to have a high-level understanding of how divorces are handled. The decisions of the state courts adjudicating an employee’s divorce can directly affect how benefits under your company’s plans will be divided between the employee and their former spouse. In addition, it is helpful to understand how the Employee Retirement Income Security Act of 1974 (ERISA), a federal law governing most employer-sponsored retirement and welfare benefit plans, interacts with state laws when an employee gets divorced.
State Law Governs Divorce
In the U.S., divorce is governed primarily by state law, with each state enacting its own statutes and regulations regulating the dissolution of marriages. These laws describe the substantive grounds for divorce and the procedural requirements for seeking a divorce, such as residency periods, filing processes, and mandatory waiting periods.
The requirements for obtaining a divorce . For example, a state may allow for divorce both on “fault” and “no-fault” grounds, while some states have eliminated “fault” as a basis for divorce. In addition, state courts must determine their ability to hear a divorce case based on whether at least one member of the divorcing couple has satisfied the state’s residency requirements, which may be as short as six weeks or as long as six months to a year.
State courts exercise primary jurisdiction over divorce proceedings, handling matters like the division of marital property (including benefits accrued under employer-sponsored benefit plans), child custody and support, and spousal support.
Interaction of ERISA and State Laws
ERISA §514(a) explicitly preempts state laws that “relate to” employee benefit plans governed by ERISA, with limited exceptions for certain federal insurance, banking, and securities laws. Courts have consistently interpreted §514(a) to mean that any state law that refers directly to employee benefit plans, or that bears indirectly on such plans, will not be enforceable against ERISA-governed plans.
For example, many states have some form of “revocation upon divorce” law — i.e., a law that, upon a couple’s divorce, automatically revokes the designation of an individual’s spouse as their beneficiary with respect to certain benefits. ERISA preempts the application of such laws with respect to ERISA-covered benefit plans. If an ERISA plan requires divorced participants to affirmatively change their beneficiary designation following their divorce, the terms of the plan will govern notwithstanding the existence of the state’s revocation upon divorce law. (The U.S. Supreme Court’s 2001 decision in confirmed this approach, holding that ERISA preempted a state law revoking beneficiary designations upon divorce.)
ERISA VS. NON-ERISA PLANS
Determining whether a benefit plan is covered by ERISA can be complicated. Most common employer-sponsored, broad-based retirement and welfare benefit plans, such as 401(k) plans; pension plans; and medical, dental, vision, or other welfare benefit plans, are governed by ERISA. Nuances in ERISA’s rules may, however, permit some plans, such as certain disability or severance benefits or policies, to be structured to be exempt from ERISA. Bonus programs, deferred compensation plans, and other voluntary benefits or payroll practices are usually not subject to ERISA. Consult with your benefit plan advisors if you are unsure whether your company’s benefit plans are governed by ERISA.
What does this mean for the administration of your company’s benefit plans?
- Where an ERISA plan is involved, you need only look at the terms of the plan to determine the treatment of spousal beneficiaries in the event of a divorce. You can ignore any revocation upon divorce law your state may have enacted — ERISA will preempt it. Instead (assuming the plan document does not automatically revoke it), the participant’s most recent beneficiary designation will continue to apply until (and unless) the participant updates it (even if it names the participant’s ex-spouse).
- For non-ERISA plans, you must also look to relevant state law to determine the extent to which you can honor any beneficiary designation. So, for such plans, if your state has a revocation upon divorce law in place, a participant’s beneficiary designation naming their ex-spouse as their beneficiary would be automatically void (unless the couple’s divorce decree provides otherwise).
ARE EMPLOYEES REQUIRED TO NOTIFY YOU OF THEIR DIVORCE
Because it is a personal event, some employees may not want to notify you of their upcoming or recently-finalized divorce, preferring to keep that information private. Others may not be aware of the impact their divorce can have on their benefit plan and tax elections. Unfortunately, an employee’s failure to notify you of their divorce — whether intentional or unintentional — may adversely affect the administration of your company’s benefits plans and lead to stress and financial headaches for the employee due to incorrect tax withholding elections and missed deadlines for updating benefits coverage elections. (See the COBRA discussion below for more detail on this point.)
Accordingly, you should encourage your employees to notify the company’s HR and benefits team following the finalization of their divorce (or, in some cases, while their divorce is pending). Including language reminding employees of this duty in the employee handbook or in benefit plan summary plan descriptions (SPDs) may be helpful. Further, while it is not legally required, an employer may consider adopting a policy requiring employees to report their divorces to the company’s HR and benefits teams.
PRACTICAL STEPS TO TAKE WHEN NOTIFIED OF AN EMPLOYEE’S DIVORCE
Notification and First Steps
Notification. In most cases, you will learn of an employee’s divorce either directly from the employee (for example, if they reach out to update their marital status or make a beneficiary change) or through the company’s receipt of a divorce decree/judgment or a domestic relations order purporting to divide the employee’s benefit plans. Some employers may have policies requiring employees to report their divorce within a short time after the divorce is finalized, providing a divorce decree or other proof to the change in marital status. Such policies may help ensure that the employee will meet various benefits-related election deadlines.
Plans and Arrangements to Review. Once you are aware of your employee’s divorce (or pending divorce), your first step is to determine the plans and benefit arrangements the employee participates in and whether they will be affected by the divorce. This will generally include retirement plans, health and welfare plans, life insurance coverage, and nonqualified deferred compensation programs. This plan information may come from internal HR records or from third-party administrators (recordkeepers, plan administrators, insurers, etc.).
Gather Your Team. Your HR and benefits teams will likely lead the review of your company’s plans and benefit records. Your legal team or outside counsel may also need to be involved if the employee’s retirement plan benefits are subject to division under a “qualified domestic relations order” (discussed in more detail below) or if you need to determine whether a particular plan or arrangement is subject to ERISA. As discussed above, the treatment of plans that are subject to ERISA, and those that are not, can be very different. Finally, your payroll team will be involved if the employee’s divorce results in changes to their tax withholding and exemptions, garnishment of their wages, etc.
EMPLOYEE BENEFIT PLANS
Qualified Retirement Plans
In general, employees may not assign their qualified retirement plan benefits (e.g., 401(k), 403(b), and pension plans) to other individuals. This rule (the ) protects a participant’s retirement plan benefits from being used, for example, by the participant as collateral for an outside loan or from being seized by the participant’s creditors to pay the participant’s debts.
There are exceptions to the anti-assignment rule, however, including the exception for domestic relations orders (DROs) that meet the requirements of a “qualified domestic relations order” or QDRO. A QDRO describes the rights of an “alternate payee” (e.g., the participant’s former spouse, dependent child, or other dependent) to receive (notwithstanding the anti-assignment rule) all or a portion of the qualified plan benefits payable to the plan participant. Unless it satisfies the legal requirements to be a QDRO (discussed below), a state court order attempting to assign or divide a participant’s ERISA‑covered benefits in a divorce will be unenforceable and the qualified retirement plan will be unable to assign or divide the employee’s retirement benefits according to the order’s terms.
What is a DRO? If a QDRO is a ‘DRO that meets certain requirements,’ then what is a DRO? Under ERISA, a is a “judgment, decree, or order (including approval of a property settlement agreement)” made pursuant to state law,1 relating “to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of a participant.” DROs are typically issued by a state’s family law courts as part of a divorce proceeding and may be drafted as separate court orders or included in court-sanctioned divorce decrees or property settlements.
We Received a DRO – Now What? Before you even receive a DRO purporting to be a QDRO, you . Your recordkeeper or other third-party administrator may have procedures it prefers to follow, or you may adopt your own procedures. Many recordkeepers also offer QDRO review/approval services to their clients. In any event, your retirement plan should have written QDRO review and approval policies (and the company should be utilizing those policies whenever it receives a DRO).
While QDRO procedures may vary from company to company, they typically require the plan administrator to both notify the participant and the alternate payee that the DRO was received, and ask the plan’s recordkeeper to place a hold on the participant’s account, segregating the alternate payee’s proposed benefit from the rest of the account while the plan administrator determines whether the DRO is a valid QDRO. (This hold can last up to 18 months. It prevents the participant from taking a distribution from their account before the DRO’s status as a QDRO can be determined.) The plan administrator, the plan’s recordkeeper, or the employer’s legal counsel (whether internal or external) must then determine whether the DRO meets the requirements of a QDRO.
What information must a QDRO include? The list of information a DRO must contain to qualify as a QDRO is not long — a QDRO :
- the name and last known mailing address of the participant and each alternate payee;
- the name of each plan to which the order applies;
- the dollar amount or percentage (or the method of determining the amount or percentage) of the benefit to be paid to the alternate payee; and
- the number of payments or time period to which the order applies.
Plan administrators may request that the participant and alternate payee provide their Social Security numbers and telephone numbers for identification purposes. However, because DROs are public records, that information should be provided to the plan administrator under separate cover to avoid potential data privacy issues.
What should not be included in a QDRO? To qualify as a QDRO, a DRO :
- provisions requiring the qualified plan to provide the alternate payee with a type or form of benefit, or any option, not otherwise provided for under the plan;
- provisions requiring the plan to provide for increased benefits (determined on the basis of actuarial value);
- provisions requiring the plan to pay benefits to an alternate payee that are already required to be paid to another alternate payee under a previously-issued QDRO; and
- provisions requiring the plan to pay benefits to an alternate payee in the form of a qualified joint and survivor annuity for the lives of the alternate payee and their subsequent spouse.
A DRO that meets all of these requirements will not fail to be a QDRO just because it is issued after the participant’s death, finalization of the divorce, or commencement of the participant’s benefit payments under the plan.
There are Problems with the DRO – Can They Be Fixed? If after reviewing the DRO, the plan administrator (or other reviewer) does not believe the DRO qualifies as a QDRO (either because it does not include the required information noted above or does include prohibited provisions), the first step to resolving the issue is to contact the party presenting the DRO and request the changes to the DRO necessary to ensure it will be treated as a QDRO.
If the DRO has already been issued (and signed) by the presiding court, that may mean the parties will need to ask the court for an amended order. To avoid that possible result, employers often prepare “model” QDRO forms. These forms include all of the required QDRO terms and provide a template that can be used by attorneys representing alternate payees to request a division of a participant’s plan benefits.
If an alternate payee (or participant) disagrees with the plan administrator’s determination as to whether a DRO constitutes a QDRO, the party can challenge the decision in court. (That said, the parties will likely prefer to address any disagreements regarding a DRO’s qualification as a QDRO outside the courts.)
Quick Reminder:
“Defined contribution” plans (including 401(k) and 403(b) plans) provide benefits that are based on an employee’s own contributions, any employer contributions (matching, profit-sharing, other nonelective), and investment gains or losses on those contributions. The employee’s ultimate benefit is limited to the accumulated balance of these items, and the employee bears the risk of market volatility.
“Defined benefit” plans (pension plans) offer participants a predictable lifetime income stream, calculated using a retirement formula incorporating factors such as the participant’s years of service, salary history, age, etc. The employer bears the risk of market volatility, as it is required to provide the formulaic benefits, regardless of the plan’s investment performance.
How do QDROs Divide Participant Plan Benefits? How a participant’s retirement benefits are divided by a QDRO will depend on a number of factors, such as, the type of retirement plan involved (defined benefit or defined contribution); the type of benefits the participant will receive; and the reason the parties are looking to divide the benefits.2
Common approaches. There are two common approaches to dividing a participant’s plan benefits through a QDRO: the “shared payment” approach and the “separate interest” approach. Either approach can be used for defined benefit plans or for defined contribution plans.
Under the “shared payment” approach to dividing benefits, the participant’s retirement plan benefits are divided between the participant and the alternate payee as they are made (according to the terms of the QDRO). This approach is often used if the participant is already receiving benefit payments from the plan and may be more easily applied to defined benefit plans.
One downside to the shared payment approach is that the alternate payee will not receive any payments under the QDRO if the participant never reaches their annuity starting date (i.e., the first day of the first period during which the participant is eligible to receive retirement benefits). This could occur if the participant died before reaching their annuity starting date.
With the “separate interest” approach, the alternate payee is granted a separate, independent right to receive all or a portion of the participant’s retirement benefit. This approach is often used in QDROs addressing payments under 401(k) and 403(b) plans, as it may allow the alternate payee to receive benefits at different times and in different forms than the participant (depending on the terms of the plan).
When using the separate interest approach, the QDRO drafter will need to specify the amount or percentage of the employee’s retirement plan account the alternate payee will receive. If the plan allows it, alternate payees receiving benefits under the separate interest approach may be eligible to take an immediate distribution of their assigned portion of the participant’s plan benefit.
What if We Know an Employee is Divorced, But Have Not Received a QDRO? Even if you know an employee is divorced, if you have not received a valid QDRO, you cannot distribute an employee’s retirement plan benefits to their former spouse, child, or other dependent. This is true even if you are presented with a divorce decree or settlement agreement — if the divorce decree or settlement agreement does not satisfy the requirements of a QDRO, you cannot legally recognize the claims of the former spouse, child, or other dependent under the retirement plan.
However, depending on its terms, you could review the divorce decree or settlement agreement in the same way you would a separate DRO intended to be a QDRO. In that case, you could communicate to the party presenting the DRO any changes necessary to treat the decree or settlement agreement as a QDRO. That approach would allow the presenting party to make any needed corrections to ensure the decree/agreement is treated as a QDRO. You might also direct the plan’s recordkeeper to segregate a portion of the participant’s account, though you might receive pushback if the participant is looking to access those funds.
Beneficiary Designations. In addition to dealing with QDROs, employees will also need to consider whether to change their beneficiary designations for their retirement plans. Typically, a married retirement plan participant will name their spouse as their beneficiary. Following a divorce, that may no longer make sense.
As discussed above, because most employer-sponsored retirement plans are subject to ERISA, state laws about beneficiary designation revocation upon divorce will not apply. As a result, the terms of the plan will determine whether an employee’s prior designation of their now-former spouse is automatically revoked by their divorce. If not, depending on the terms of the applicable plan, the ex-spouse may continue to be treated as the employee’s beneficiary until the employee updates their elections.
No matter how your company’s qualified retirement plans address beneficiary designations following a divorce, you should remind divorced employees to review their beneficiary designations and make any needed or desired changes. (This is true even if your plans automatically revoke a spousal designation on the employee’s divorce. In that case, unless the employee names a new beneficiary, the plan’s default beneficiary rules will apply.)
Welfare Plans
Group Health Plans
Determining an employee’s rights under your company’s group health plans following a divorce may cause a lot of headaches for your HR and benefits teams. Assuming your health plan is part of an Internal Revenue Code (Code) §125 “cafeteria” plan, an employee’s divorce will be a change in status event that will permit mid-year election changes. In addition, the divorce will likely be a COBRA qualifying event for the participant’s former spouse (assuming the spouse loses coverage under your health plan) and dependent children (if they are no longer treated as the employee’s dependents).
Divorce as a Change in Status Event. Divorce, along with legal separation,3 constitutes a change in status event that will allow an employee to change their elections under your group health plans. So, a divorced employee may elect to change their elections to drop coverage for their former spouse. The employee will have a limited window (typically, between 30-60 days, as set forth in the plan) to make any such change.
An employee’s election to drop coverage of an ex-spouse. The employee’s change in elections should be consistent with the status event — for example, an employee could elect to drop coverage for their ex-spouse following the couple’s divorce. However, the employee could not change coverage elections for themselves or for other dependents not affected by the divorce. Following the loss of coverage, the ex-spouse and any affected children may be eligible for benefits under COBRA (or mini-COBRA, depending on the size of your company), as discussed below.
An employee’s election of coverage. If one of your employees has coverage under their former spouse’s health plan, their divorce will constitute a change in status event. So, if the employee’s ex-spouse drops them from the spouse’s coverage, the employee can elect to participate in your company’s health plan due to their divorce and loss of coverage under their ex-spouse’s plan.
Within the time frame set by the plan (usually 30-60 days) following the loss of coverage under their ex-spouse’s plan, the employee may elect to enroll in coverage under your health plan. The employee’s coverage will begin as provided under the terms of the plan. (Code §125 typically does not permit retroactive enrollments.)
Timing is key. While the window for making election changes is set by the plan, it is important the employee meets all noted deadlines. An employee’s failure to timely drop coverage for their former spouse could result in the employee continuing to pay for coverage the spouse is no longer eligible to receive (because former spouses are not eligible to participate in your health plan). Similarly, the employee’s failure to timely elect to participate in your plan may mean that employee will not have healthcare coverage until the next plan year.
Group Health Plans Subject to COBRA. If an employee’s covered spouse and/or dependent children lose group health coverage under your company’s group health plans due to divorce, that will constitute a qualifying event for COBRA continuation coverage purposes. COBRA generally applies to ERISA-covered plans providing health benefits, including medical, dental, and vision plans.
If your company offers a health FSA, it may have a limited COBRA obligation to the employee’s former spouse and dependent children under the health FSA.
Offering COBRA. Your company will be subject to federal COBRA rules if, in general, it has . If your group health plan provides that covered spouses are ineligible to participate in those plans upon their divorce from a covered employee, a former spouse will experience a qualifying event on the date of such divorce.4
Under COBRA, in order for a former spouse to be eligible for COBRA, either the employee or the former spouse must notify the health plan’s plan administrator of the couple’s divorce within 60 days of the divorce. Unless you have independent or informal knowledge of the employee’s divorce, the plan is not required to offer COBRA to the former spouse if such notice is not timely provided.5 The plan administrator must provide a COBRA election notice to the former spouse within 14 days after being notified of the couple’s divorce.
The former spouse will then have 60 days from the date of the qualifying event (i.e., the divorce) to elect COBRA continuation coverage. If the ex-spouse elects COBRA, the coverage will continue for up to 36 months. (A similar COBRA coverage period will apply to the employee’s children if they cease to be the employee’s dependents due to the divorce.)
What Happens if We Are Not Timely Notified of an Employee’s Divorce and the Spouse Does Not Timely Elect COBRA? As noted above, under COBRA, the plan is not required to offer COBRA to a former spouse if the plan administrator does not receive timely notice of the couple’s divorce. The ex-spouse’s loss of the ability to elect COBRA continuation coverage could be significant. As a result, it is important that your employees notify you when they experience divorce. Make sure the health plan’s summary plan description (SPD) and any other similar documents clearly describe the notification process.
If neither the employee nor the former spouse notify you of their divorce within the 60-day notification window (and you do not informally learn of it), you may retroactively terminate the ex-spouse’s coverage under the plan, so long as your SPD is clear about the need to promptly notify the plan administrator of a divorce. In that case, per , the retroactive termination will not be viewed as an impermissible rescission under the Affordable Care Act.
What if COBRA Does Not Apply to Our Company? If you are a small employer (under 20 employees) not subject to the federal COBRA rules, you may still be subject to similar requirements under a state “mini-COBRA” law. If your health plan is subject to a mini-COBRA law, do not assume that your insurance carrier will administer your health policy’s mini-COBRA provisions. In many cases, insurance policies place administrative obligations, such as the obligation to notify participants about their rights to mini-COBRA benefits, on the employer.
Health Savings Accounts (HSAs)
If your company offers a high-deductible health plan option, employees participating in that plan may be eligible to contribute to a health savings account (HSA). The employee’s HSA (including any employer contributions to the HSA) may be subject to division in a divorce. Because HSAs are not subject to ERISA, the HSA administrator can divide the employee’s HSA as set forth in the divorce decree, separate maintenance agreement, or other agreement. No QDRO is necessary.
Under Code §223(f)(7), an employee’s interest in their HSA can be transferred to a separate HSA established for the employee’s former spouse pursuant to the terms of a divorce decree, separate maintenance agreement, or other agreement. Transfer of a portion of the employee’s HSA to their ex-spouse’s new HSA will not be taxable to the former spouse, nor will it subject the employee to the additional 20% excise tax on impermissible HSA distributions. After the transfer of assets from the employee’s HSA to the ex-spouse’s new HSA is completed, the ex-spouse shall have the same rights regarding the funds in their HSA as any other HSA holder.
Life Insurance and Other Insured Benefits
Life Insurance. While there are many types of life insurance, two of the most popular options are “whole” and “term” life coverage. “Whole” life insurance is a type of investment, providing permanent, lifelong coverage with the ability to build cash value in the policy itself. In contrast, “term” life insurance coverage is limited to a specific time period and does not build cash value. Typically, employer-provided life insurance is term coverage, though C-suite employees may participate in more complicated compensation arrangements (such as split-dollar life insurance plans and similar arrangements) incorporating whole life policies.
For term policies, an employee’s biggest concern in a divorce is likely to be who is named as the beneficiary under the policy. It is likely that the employee listed their former spouse as their beneficiary and will want to make a change. As with qualified plans, if the life insurance coverage offered constitutes an ERISA plan, employees will need to make any beneficiary changes in accordance with the terms of the arrangement. Employees should be encouraged to review the beneficiary designations for their policies, removing and replacing the former spouse, if desired, as provided by the plan.
Because whole life policies typically have at least some value outside the death benefit they provide (due to the cash surrender value they may have accumulated), stand-alone whole life policies (even if purchased by the company on an employee’s behalf) may be subject to division in the divorce proceedings. If a whole life policy is used as a funding mechanism in a more complicated compensation arrangement, you will need to review the terms of that arrangement carefully to determine whether the participant’s ex-spouse will have any rights under the arrangement.
Other Insured Benefits. An employee’s eligibility for benefits payable under short- and long-term disability insurance, accidental death and dismemberment coverage, and other such coverages are generally unaffected by divorce. However, any death benefits payable under those policies may raise same beneficiary designation issues as life insurance. Divorced employees should review their beneficiary designations under any of these programs to ensure their beneficiaries are updated as desired.
What is a “Top Hat” Plan?
A “top hat” plan is an unfunded NQDC plan maintained by an employer for the benefit of a select group of management or highly compensated employees. Top hat plans are exempt from ERISA’s participation, vesting, funding, and fiduciary requirements. They remain subject, however, to certain ERISA reporting and disclosure rules. (These obligations will be relaxed, however, if a “top hat” statement regarding the NQDC plan is timely filed with the Department of Labor.)
NONQUALIFIED DEFERRED COMPENSATION (NQDC) PLANS
NQDC plans are a form of retirement plan that do not meet the requirements imposed on “qualified” retirement plans under ERISA and Code §401(a). NQDC plans that are considered “top hat” plans (see inset) are exempt from many, though not all, aspects of ERISA.
This includes the obligation to honor valid QDROs purporting to divide the benefits offered under a NQDC plan between the employee and their ex-spouse. However, because NQDC plans are subject to certain other provisions of ERISA, they are arguably exempt from state laws governing the division of marital assets. As a result, employers sponsoring NQDC plans are in a unique position — they are not required to honor DROs but may elect to do so if they wish. (See our prior article for more information about the ability of NQDC plans to honor DROs.)
Because NQDC plans may honor DROs if the employer chooses, if a divorcing employee participates in such a plan, it will be important to review the NQDC plan’s terms carefully to determine the approach the plan takes. If the NQDC plan specifically provides for the recognition of DROs, the acceleration of payment to the employee’s ex-spouse will be permitted. (That’s true even if the NQDC plan is subject to the stringent requirements of Code §409A. There is a specific exemption from Code §409A’s general anti-acceleration rule for payments made pursuant to DROs.)
If it is not clear from your review of the NQDC plan that it honors DROs, you should not honor any DRO received in connection with the employee’s divorce. In those circumstances, any acceleration of benefits to pay the former spouse under the NQDC plan would be treated as an impermissible acceleration of benefits under Code §409A, resulting in significant taxes and penalties to the participant.
ANCILLARY IMPACTS ON THE HR AND BENEFITS TEAMS
Dealing with Document Requests and Subpoenas
Divorce cases can be complicated and messy. Your HR and benefits teams may receive requests or subpoenas for documents and information, including requests for the employee’s salary or wages, benefits, work history, and similar items. Before providing any information in response to such a request (even to what may appear to be a properly drafted subpoena), you should provide your employee with a copy of the request/subpoena and allow the employee and their attorney time to review it and object to the production of any items or documents requested.
Privacy Concerns
The HR and benefits teams may be asked to deal with sensitive personal data in connection with an employee’s divorce. Because such information is considered confidential, your teams should be careful not to disclose such information outside the company. Copies of divorce decrees, correspondence, notices, and updated beneficiary designations should be retained securely. In addition, to the extent you are dealing with group health plans, keep HIPAA’s privacy requirements in mind and avoid sharing protected health information outside of plan-administration functions without proper authorization.
[1] DROs may also be issued by Tribal courts pursuant to Tribal law.
[2] See Q. 3-1, U.S. Department of Labor publication “QDROs – The Division of Retirement Benefits Through Domestic Relations Orders.”
[3] “Legal separation” is not defined for purposes of Code §125. Rather, whether a couple is legally separated will be determined under the applicable state’s family law principles.
[4] These rules also apply to an employee’s dependent children if they will no longer be dependents eligible for coverage under the health plan due to the employee’s divorce.
[5] See Treas. Reg. §54.4980B-6, Q-2.
