When a couple divorces, and the marital assets divided, many do not consider that a retirement fund belonging to either spouse is indeed part of their marital community property. To be more specific, that portion of the retirement account that was built up during the course of the marriage is community property. This necessitates complex calculations done by a specialized accountant, the final amounts of which are placed in a Qualified Domestic Relations Order, and signed by the court. To explore this concept, consider the following Qualified Domestic Relations Order definition.
Definition of Qualified Domestic Relations Order
- A court order establishing the right of a former spouse to receive a specified portion of the individual’s retirement plan.
1974 A result of the enactment of the Employee Retirement Income Security Act (“ERISA”)
What is a Qualified Domestic Relations Order
Although a divorcing couple may come to an arrangement regarding distribution of their marital assets, including either party’s retirement plan, the actual division or payout of the plan must be put into a special court order called a Qualified Domestic Relations Order, or “QDRO” (pronounced “quadro”). The QDRO is made in addition to a Marital Settlement Agreement (“MSA”), or a final divorce decree.
The QDRO gives specific directions to the administrator of the retirement plan as to how the retirement account should be divided between the spouses. These instructions include not only how much of the plan’s assets are to be allocated to the former spouse, but how and when those assets will be paid, and how the tax consequences will be handled. For this reason, it is vital that a QDRO be complete and accurate.
Do All Types of Retirement Plans Need a QDRO
Employers offer retirement plans to their employees in a variety of forms, not all of which require the creation of a QDRO upon divorce. Retirement plan types that do not need a QDRO include:
- Individual Retirement Account (“IRA”)
- Deferred Annuities
- Government Retirement Plans, such as military pensions, or federal, state, county, or city retirement plans
A QDRO is required to divide any of these types of retirement plans:
- 401(k), 403(b), and 457 Plans
- Profit-Sharing Plans
- Employee Stock Ownership Plans
- Thrift Plans
- Money Purchase Plans
- Tax-Sheltered Annuities
- Corporate Defined Benefit or Pension Plans
Who Can Prepare a QDRO
While all family law attorneys find certain clients in need of a QDRO in their divorce, very few actually prepare them because the laws governing the division of retirement plans are complex. Most family law attorneys refer the matter of the QDRO out to an attorney who specializes in the preparation of Qualified Domestic Relations Orders, or refers the calculations out to a type of forensic account who specializes in QDROs.
The QDRO specialist calculates the value of the retirement account at the time the couple married, as well as on the date of the couple’s separation. Because retirement accounts contain not only the payments put into them by the employee and employer, but interest and other income as well, and because there are tax consequences to withdrawing money early, this is a complicated endeavor. Additionally, because the couple may reach an agreement, or be ordered by the court, to divide the marital asset portion of the account unevenly (not 50/50), the QDRO specialist gives these calculations to the attorney, along with instructions for calculating the exact amount payable to the former spouse.
When an attorney has had a client’s retirement plan valuated by a QDRO accountant, he then uses a Qualified Domestic Relations Order form to plug the numbers into, creating an order for the judge’s review.
How QDRO Payments are Made
If the retirement plan allows lump-sum payouts, the former spouse, referred to as an “alternate payee,” may choose to receive his or her share in a lump-sum payment, or to deposit his or her share into an IRA or other eligible retirement plan. Certain retirement plans, such as defined benefit plans and pension plans, commonly make payments to the alternate payee in monthly installments for a specified period of time.
Tamara and Nathaniel are divorcing after being married 17 years. According to the accountant, Nathaniel is entitled to receive $128,000 as his portion of Tamara’s retirement account. Because he needs to buy a new house in which to live, Nathaniel elects to receive a lump sum payment of $80,000, to use as a down payment, and roll the remaining sum of $48,000 into an IRA.
Tamara’s attorney prepares a Qualified Domestic Relations Order that specifies the amount to which Nathaniel is entitled, and how Nathaniel has decided to receive payment. The QDRO also specifies that Nathaniel is responsible for the tax consequences of his portion of the retirement funds.
Dividing Retirement Benefits Without a QDRO
Even individuals who have a retirement plan that would normally require a QDRO to be divided can avoid dealing with the plan directly. This is commonly done with a buyout agreement, in which the employee spouse keeps his or her retirement plan intact, and pays the former spouse the value of his or her interest in the plan as a cash payment, or relinquishing his or her ownership interest in another marital asset. The advantage to this type of division of a retirement plan is that it avoids penalties and tax consequences of dividing the plan itself. Both spouses must agree to such a buyout, which is put in writing as part of the Marital Settlement Agreement or the final Judgment of Divorce.
In order to calculate a buyout amount, it is necessary for the parties to know how much of the plan is actually community property. For a plan like a 401(k) or 403(b), the parties can look at statements to find the value on the date the couple was married, and the value on the date of separation. Some quick arithmetic provides the community property value of the plan.
With a plan that would normally require a QDRO, however, calculating value isn’t that easy. The value of such a plan is based on a payout that will occur in the future, taking into account growth from interest and income to the plan. Once again, a QDRO accountant will need to be consulted in order to place an accurate value on the marital property portion of the retirement account.
Janet and Henry send Henry’s retirement account information to a forensic accountant to discover how much of the account is subject to division during their divorce. Henry worked at his job three years prior to his marriage to Janet, and the couple was married for 7 years before they separated and filed for divorce.
The accountant returns information for the QDRO, specifying that Janet is entitled to her half of the marital asset in the amount of $32,471. As the couple owes just over $30,000 on their home mortgage, they decide to leave Henry’s retirement account alone, and Henry signs over the house to Janet, agreeing to finish paying off the mortgage in exchange for her portion of his retirement account.
Legal Requirements for a Qualified Domestic Relations Order
Every QDRO must meet specific legal requirements described in the IRS Code Section 414(d). These requirements include:
- The QDRO must make provisions for child support, spousal support, and marital property rights of a former spouse or child dependent of the plan participant.
- The QDRO must specify the alternate payee’s right to receive all or part of the participant’s benefits under the plan.
- The QDRO must specify the name and last known mailing address of the plan participant, and the alternate payee.
- The QDRO must specify the amount or percentage of the plan participant’s benefits to be paid to the alternate payee.
- The QDRO must specify the manner in which the amount or percentage is to be paid to the alternate payee.
- The QDRO must specify the number of payments, or number of pay periods, to which the Order relates.
- The QDRO must specify each of the employee’s qualified retirement plans are subject to the Order.
What a QDRO Cannot Do
- Require the retirement plan to pay increasing benefits to the alternate payee.
- Require the retirement plan to pay benefits to a new or different alternate payee once an alternate payee has been named.
- Require the retirement plan to provide a type of payment or form of benefit not otherwise provided by the plan.
Related Legal Terms and Issues
- Community Property – All property purchased or acquired by a couple during the course of their marriage or domestic partnership that is not a gift or inheritance.
- Marital Assets – All property, financial assets, and debt acquired by the couple during the course of the marriage, regardless of who holds title to it.
- Marital Settlement Agreement – A written agreement setting forth terms for a divorce agreed to by the couple, covering such issues as child custody and support, spousal support, division of property and debt, and other relevant issues.