Dividing Retirement Accounts in a Divorce—What exactly is a QDRO and how does it affect you?
If you’re in the midst of a divorce, or have just recently been through one, chances are dividing retirement accounts is or was a major source of contention. Under Indiana law, the courts presume an equal division of property. Courts can deviate from the presumption, but going by the presumption of a 50/50 split, parties could divide each asset and debt right down the middle. Sometimes, though, it may make more sense to divide assets and debts in an easier way— meaning parties don’t always have to split their assets/debts one by one, but rather can weigh and divide the assets and debts equitably. For example, parties agree that Husband may keep his $10,000 IRA, while Wife may keep her $5,000 401(k), plus the $5,000 from the parties’ savings. Each party keeps their own retirement account, eliminating the need to worry about transferring benefits to one another. The assets are divided in a fair and equitable manner, but each asset isn’t necessarily divided individually. But what happens if it’s not that easy and you need to transfer retirement benefits to the other party?
Generally speaking, retirement benefits cannot be distributed to anyone other than the actual plan participant. The plan participant is an individual who participates in an employer sponsored retirement plan. However, the Employee Retirement Income Security Act (“ERISA”) allows exceptions for an alternate payee and states that through a Qualified Domestic Relations Order, a plan participant’s benefits can be transferred to an alternate payee for certain reasons. It is important to note that not all retirement plans are governed by ERISA, but we’ll get to that a little later. An alternate payee is any spouse, former spouse, child or other dependent of a plan participant that has a right to the participant’s retirement benefits.
“QDRO” (kwah-dro) is short for Qualified Domestic Relations Order. A QDRO is a domestic relations order that creates or recognizes an alternate payee’s right to receive a portion of a plan participant’s retirement plan. A domestic relations order is any judgment, decree, or order which relates to child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of a participant. The domestic relations orders must be made pursuant to State law. In other words, it needs to be approved by the court that has jurisdiction over your divorce case. If you’ve entered in to a property settlement agreement in your divorce case, this would count as a domestic relations order. The “qualified” portion simple means that the domestic relations order complies with all the requirements under ERISA in order for the plan to recognize that an alternate payee has a right to a participant’s benefits.
How do you know whether your retirement account is governed by ERISA and requires a QDRO?
ERISA governs private sector employers who choose to create employee benefit plans that comply with ERISA in order to get preferential tax treatment. If your company offers these type of benefits, they are most commonly going to be in the form of a defined contribution plan or a defined benefit plan. The most common type of defined contribution plan is a 401(k). In these types of plans, an employee can make pre-tax contributions into an account and employers can make contributions as well. The name itself, defined contribution, reflects that the amount of employee contributions is the only amount that is guaranteed. A pension plan is the most common type of defined benefit plan, which guarantees a certain amount at retirement, typically a monthly amount, based on an employee’s years of service to the company. Defined contribution plans are much easier to divide because at the time of a pending divorce, you will be able to ascertain the present value of the account. A defined benefit plan is more difficult in that actuarial calculations have to be done in order to estimate what the value is going to be worth at the participant’s retirement.
Government plans, IRAs, and any non-qualified plans are exempt from ERISA, which means a QDRO is not necessary. Most non-ERISA based plans have some mechanism available to transfer benefits, but there are some non-ERISA plans out there that do not allow a transfer of benefits so it is important to figure this out prior to any final settlement agreement.
If your plan does fall under ERISA, then a QDRO is necessary and is the only mechanism available in order to transfer those benefits for purposes of child support, alimony, and marital property rights of a spouse or former spouse. The specific requirements under ERISA that make a domestic relations order qualified are fairly straightforward. Under ERISA, QDROs must contain the following:
1. The name and last known mailing address of the participant and each alternate payee,
2. The name of each plan to which the order applies,
3. The dollar amount or percentage (or the method of determining the amount of percentage) of the benefit to be paid to the alternate payee, and
4. The number of payments or time period to which the order applies.
Often times, companies will require preapproval of a QDRO prior to court approval. It is always smart to notify the company of a pending QDRO. Even if they don’t require preapproval, ERISA has specific escrow rules which state that once a company is on notice of a pending QDRO, the funds go in escrow until qualified status can be determined. This is to prevent a plan participant from making any irrevocable distributions that may affect a benefit an alternate payee would be entitled to.
Sounds easy right? Although the requirements above may seem simple, there are also certain provisions that a QDRO must not contain. The drafter must also consider the type of plan, the type of benefits available, how/when the plan allows benefits to be distributed, whether the participant is vested, actuarial calculations, and much more when drafting a QDRO. All of these considerations make drafting a QDRO more complicated than it may first appear.
Whether you are thinking about divorce, going through a pending divorce, or have already been through one, the attorneys at Banks & Brower, LLC can help you navigate through the maze of dividing your retirement accounts and the complicated process of getting those benefits transferred. Give our experienced Indianapolis Family Law Lawyers a call today, 24/7/365, at 317.870.0019, or email us at email@example.com.