Impact of QDROs on Participant-Directed Accounts (Posted May 21, 1999) Technical Tip 5: The following question and answer appeared in the Fall 1998 Western Key District IRS EP/EO Bulletin (in response to a question submitted at the IRS Q&A session at the Seventh Annual Western Region IRS/Practitioners Benefits Conference): A qualified plan allows participants to move accounts between a menu of mutual funds by a toll-free telephone call (800#). Then, the plan administrator receives a QDRO draft. When should the plan "freeze" the account and disallow transfers unless the alternate payee consents? Would it be upon receipt of the QDRO document, upon determination that the QDRO document is written and signed correctly or at some other time? IRS Response: Notice 97-11, 1977-2 I.R.B. 49, Appendix A, paragraph 1, discusses the general requirements of a QDRO. Note that a draft QDRO is not a valid QDRO until the applicable state authority adopts it. Once the QDRO is adopted, it will state in specific detail what benefits under the plan are payable to the alternate payee. Thus, it may not be necessary to cease telephone transfers of funds if the participant has sufficient cash or other property in their account(s) to meet the requirements of the QDRO. Comment by the RLR&C ERISA Attorneys: Our interpretation of the IRS answer is: (1) a Domestic Relations Order (DRO) is not effective until it is qualified (Q) by the ERISA Plan Administrator and entered by the state court; (2) until the DRO is qualified and entered, it does not have any legal effect on the Plan; and (3) once the DRO is qualified and entered by the court, the terms of the QDRO govern who will have investment control over the accounts. Thus, the participants could direct any portion of the benefit which remains his after the entry of the QDRO. However, we note that the provisions of a plan's QDRO Procedures play a key role in determining when any actions (such as placing a "freeze" on a participant's account during the marital dissolution process) may be taken; at least one case in the Seventh Circuit Court of Appeals has held that the QDRO Procedures, required to be adopted by every qualified plan pursuant to IRC §414(p)(6), govern specifically when such actions may be valid. View all Tips © 1999-2012 Reish Luftman Reicher & Cohen, a Professional Corporation Important notice: Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner's situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation.