Dividing Qualified Retirement Plans in the Aftermath of Divorce

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Splitting assets during a divorce can be an arduous task. To complicate things, the division of certain retirement savings accounts require extra steps.

Divorce proceedings often conclude with a domestic relations order (DRO) to lay out the division of retirement assets. Assets from a qualified retirement plan, such as a 401(k), are covered by the Employee Retirement Income Security Act of 1974 (ERISA). These types of retirement plans have stricter rules when it comes to benefit distribution and therefore require an approved DRO is known as a Qualified Domestic Relations Order (QDRO). The difference between a DRO and QDRO is that the DRO simply hasn’t yet been approved by the Plan Administrator.

Federal law stipulates that a QDRO is required for qualified plans like defined benefit plans, ESOPs, 401(k) plans, and profit-sharing plans. According to ERISA and Internal Revenue Code, most qualified retirement plans won’t pay any benefits to an ex-spouse without a QDRO because plan participants can’t legally assign their stake in the plan to someone else. Therefore, the QDRO is used to distribute benefits to an alternative payee.

When a QDRO isn’t Needed
Non-qualified plans, such as Individual retirement accounts (IRAs) are not covered by ERISA. This exempts them from the requirement of a QDRO to divide assets. Additionally, during divorce settlement negotiations, one spouse may propose trading another asset in place of a share in a retirement account which would eliminate the need for a QDRO.

Retirement Plans for Federal Government employees refer to such Court Orders as a COAP (Court Order Acceptable for Processing). The military refers to such Orders a Military Retired Pay Division Order (MRPDO). This is required where the former spouse is not qualified to receive his or her share directly from the Defense Finance & Accounting Service (DFAS). This is known as the 10/10 rule. If the parties were married for at least ten (10) years and the spouse was in the military for ten (10) years and the years of the marriage overlap with the years of military service, than DFAS can pay the former non-military spouse directly. If the couple does not meet the 10/10 rule requirements, the MRPDO is necessary to divide the military spouse’s pension.

Division of Assets
The division of assets under a QDRO must abide by state law. The amount of retirement assets can be take into account and consider other assets, child support, alimony, or other marital property rights. In addition, the Courts may issue a QDRO to secure child support arrears or payments.

While a QDRO may require a participant to pay out a portion of funds, the Court will generally divide only the marital amount of these benefits. This means contributions made prior to the date of the marriage or from the date of marital separation may not qualify as divisible funds.

QDRO Benefits
The participant is the retirement plan owner, and while it may seem like a QDRO primarily benefits the alternate payee, the participant can benefit as well.

Federal law imposes a 10% penalty on withdrawals taken by individuals prior to age 59.5. However, withdrawals made according to a QDRO are not subject to early withdrawal penalties.

Benefits distributed from a retirement plan under a QDRO are treated as income and are therefore taxable to the participant. When funds are sent to an ex-spouse, the funds become part of their income meaning the ex-spouse and not the participant will be responsible for the tax.

If you are entitled to an assets of an ex-spouse’s qualified retirement plan according to a divorce decree, a QDRO is required for the retirement plan administrator to divide the plan assets.

If you have questions about your pending or finalized divorce assets, contact our office. We can help you determine if a QDRO is needed as well as help draft your QDRO form.

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