I routinely encounter situations where the parties’ most substantial asset (after possibly their marital residence) is there retirement account.
A retirement account may include a defined contribution plan (i.e 401k, savings plan, investment plan) or defined benefit plan (i.e. traditional pension plan).
Oftentimes the division of the retirement account is necessary for the division of marital property (equitable distribution) or to satisfy support obligations (alimony) or attorney’s fees.
Let’s breakdown a Qualified Domestic Relations Order (QDRO)
A QDRO is the mechanism that can be used to transfer all or a portion of a retirement account from the participant to their spouse or another qualifying beneficiary (called the “alternative payee”).
To be clear, it is very important to have an experienced family law and divorce attorney discuss the importance of a QDRO when a retirement account is in play.
A QDRO is the best way to ensure that retirement monies are properly allocated and safeguarded.
Many times, the retirement plan administrator requires a QDRO before an alternate payee can be awarded a benefit.
Without a properly executed QDRO, death of the participant, foul play (participant depleting the account, changing the payouts, or changing the alternative payee), or improper notice to the administrator is a foreseeable possibility.
The cost to prepare a QDRO is “small potatoes” compared to the cost to enforce a marital settlement agreement (MSA) where the retirement account is not properly allocated.
For example, Husband and Wife separate in 2010.
Husband pays Wife ½ of pension benefits each month by direct deposit at $500.00 per month.
Husband and Wife divorce in 2013. The parties’ MSA states that Husband will continue to pay Wife ½ of pension benefits ($500.00) each month by direct deposit.
No QDRO is entered however specifying these terms.
In 2013, the Husband unilaterally advises the administrator to pay the Wife $400.00 per month, a decrease of $100.00.
The Husband also removes the Wife as the alternative payee in the event of death (as this was not previously elected by the Husband during the marriage).
The Wife files a Motion to Enforce the MSA.
The Husband dies in 2014 (before the Motion to Enforce is heard by the Court). The Husband’s pension plan was never placed on notice to remit payment to the Wife after his death.
The Husband’s pension plan did not apply a cost of living increase (COLA).
Worse yet, and unbeknownst to the Wife, the Husband’s pension plan designates his new wife as the surviving spouse for the purposes of determining survivor benefits beneficiary.
The Wife is required to file pleadings in probate Court to litigate her Former Husband’s pension benefits.
What is required for a QDRO:
- Date of Marriage
- Date of Divorce
- Name of Judge, County and Case Number
- Complete Address, DOB and SS# of Both Parties
- Case Styling
- Copy of the Plan Document or Summary Plan Description
- Copy of MSA
Types of plans with QDRO
Defined Contribution Plan
A properly executed QDRO will alleviate any confusion over:
- The valuation date (i.e. date of separation, date of filing, or date of trial (or mediation))
- Who is responsible for administrative fees
- Marital v. non-marital portions of the account
- Exemption from 10% early withdrawal fee – if funds are withdrawn before the age of 59.5 in an IRA; and (5) whether a lump sum option permissible and how to avoid the tax consequences
Defined Benefit Plan
A properly executed QDRO will alleviate any confusion over shared v. separate payment.
Shared v. Separate Payment
The most common benefit associated with a defined benefit plan is an annuitized monthly payment, which generally commences as of a set date of retirement.
The two options on how benefits will be divided and paid are shared interest payment and separate interest payment.
- Shared Payment
Under this option, the annuitized payment is calculated based solely on the life expectancy of the participant; the alternative payee begins receiving benefits only when the participant begins receiving benefits, and upon death of the participant, all benefit payments will stop, unless the alternative payee has been elected/ordered to be the participant’s survivor beneficiary.
- Separate Interest Payment
Under this option, the pension plan will perform a present value calculation of the pension as of a started date of valuation. The pension plan will then sever that total benefit proportionally, depending on the terms of the QDRO, so that each spouse has control over the start date of their benefit.
This is one of the most important reasons to have a properly executed QDRO.
The QDRO will specify the death and survivor benefits for the alternative payee, as well as what the effect the alternative payee’s death will have on the total benefit payable from the plan.
The two types of survivor benefits include:
- QPSA – which pays a death benefit to an alternative payee in the event that the participant dies prior to retirement
- QJSA – which pays a death benefit to an alternative payee in the event that the participant dies after retirement and benefit commencement
Under a shared interest approach, when the participant dies, generally the normal retirement annuity ends – depending on whether a survivor option has been selected.
If a survivor option has been selected, the former spouse typically receives a reduced amount of benefits (i.e. 50% of the monthly payout).
Stated another way, without a properly executed QDRO specifying a survivor benefit (assuming the survivor benefit was not elected at retirement (which is irrevocable)) the former spouse could potentially receive no pension.
Additionally, the QDRO can specify that in the event the alternative payee (i.e. former spouse) predeceases the participant, the alternative payee’s benefits can transfer to another alternative payee.
Determination of Marital Portions
The portions of the pension acquired during the marriage are marital property.
What happens in the event that one spouse continues to build up years of service for his/her pension (i.e. has not retired) until after the parties separate?
A properly executed QDRO addresses this issue – either by an “immediate offset” or “deferred distribution” so that both parties’ are protected.
There are many other benefits of a QDRO – this article only addresses the most common issues that may arise.
Suffice it to say, in almost all scenarios, it is the alternative payee’s best interest to have a properly executed QDRO to avoid (potential) future litigation and ensure the proper distribution options.
As understanding a QDRO can be complicated, it is crucial you retain a trial attorney at Lyons, Snyder & Collin familiar with divorce, alimony and support that involve retirement accounts.
If you have any questions concerning QDROs please contact divorce attorney Sean Collin for a free consultation.