Law Office of Elizabeth McMahon 206-A Meadow Street Branford, CT 06405
A Qualified Domestic Relations Order (QDRO) is a court order separate from the decree of dissolution or marriage or decree of legal separation that is needed to assign part or all of a qualified retirement plan. The assignment can be for the division of marital property or to provide alimony or child support. The court order is typically made as part of the final judgment, but the court can enter a QDRO pendent lite (while the litigation is pending) or post judgment as well. The assignment can only be made to a spouse, former spouse, child or dependent of the plan employee (employee).
Qualified Retirement Plans are subject to anti-alienation rules that protect retirement benefits from creditors, and have special tax-deferred status which can be lost if the Plan does not follow strict rules regarding contributions and distributions. QDROs were created in 1984 by an amendment to the Employee Retirement Income Security Act (ERISA). Before QDROs, there was confusion over whether a former spouse was a creditor. Many plans would not honor a divorce decree that awarded a portion of the retirement benefits to the non-employee spouse, because they risked losing their qualified status.
ERISA created an exception to the anti-alienation rules to permit distributions to be made to a spouse, former spouse, or other dependent of the employee. Without a QDRO, the plan cannot make a distribution to the former spouse.
There are two kind of qualified retirement plans: Defined Benefit Plans and Defined Contribution Plans. See plan types
No, although most employer retirement plans are qualified. To be qualified means the plan is subject to 414(p) of the Internal Revenue Code and Section 206(d) of the Employee Retirement Income Security Act of 1974, as amended, and therefore can be divided by QDRO.
Non-Qualified Plans are federal, state and local government retirement plans, Post Office, military, churches, railroads. These plans generally will accept domestic relations orders, but there are limitations that apply to the traditional pensions. The former spouse does not have the protections of ERISA such as:
Highly Compensated Employees also have supplemental or executive retirement plans in addition to qualified retirement plans. The supplemental or executive plans often cannot be divided by court order, in which case the employee can be ordered to make payments as they are received. Determining the amount to assign can be difficult, however, if the employee is still earning benefits under the supplemental or executive plan. In addition, the supplemental or executive plans may be subject to FICA taxes that cannot be shifted to the former spouse. I strongly advise you consult with a seasoned accountant before dividing a supplemental or executive retirement plan.
IRAs are not qualified plans and should not require a QDRO for division. Generally, the institution requires a copy of the judgment of dissolution of marriage and a letter of instruction from each of you. The transfer must be made directly into an IRA in the recipient’s name so that the pre-tax status is maintained, and so that the transfer is not taxable to either of you. It is our practice to have the receiving account be at the same financial institution as the source account to reduce the chance of error.
Before retaining this firm, you may wish to consult with your financial advisor or the financial institution about the procedure. If you would like our assistance, we will prepare and serve the letter of instruction for the same price we charge for QDROs.
Couldn’t I save money by just withdrawing the funds and giving them to my former spouse?
Generally, there are restrictions on an employee’s ability to access his/ her 401(k). Even if you could access the funds, there are some advantages to the QDRO. If you take an early distribution, you will be liable for income tax, and you will be subject to the 10% early distribution penalty. As long as the QDRO’d funds are going to a spouse or former spouse, the tax burden is shifted to the former spouse. Your former spouse will have the choice of rolling the assigned benefit into an IRA (which is not a taxable event), or of cashing out the assigned benefit. As long as the source plan is an ERISA qualified plan, and the distribution is by QDRO, the early distribution penalty will not apply. https://www.irs.gov/taxtopics/tc558.html Note: IRAs are not ERISA qualified plans.
1. We try to draft the QDRO within two weeks of having been paid and receiving all of the requested information.
2. We submit the QDRO to the plan administrator for pre-approval, but do not have control over how long it takes for the administrator to respond. We docket the file to follow up in six weeks, but often have a response before then.
3. We then circulate the QDRO for signing. Again, we do not have control over how long it takes for either party to review and sign the order, but we docket the file to follow up in a month if we do not receive the signed QDRO back before then.
4. We send the signed QDRO to court to be signed by the judge. Some courts are able to review and sign the QDRO within a couple of weeks, and some courts take over a month.
5. Once we get a certified copy of the QDRO back from the court, we send it to the plan administrator by certified mail, return receipt. We send each party a copy of the QDRO as well. Once we serve the QDRO on the plan administrator, we close the file. From this point on, you deal directly with the plan administrator.
Once the QDRO is signed by the court and received by the plan administrator, you will deal directly with the plan administrator for your distribution or to commence monthly pension benefits. The plan administrator should send the former spouse distribution forms to complete. Some plan administrators disburse the funds directly to the former spouse if they do not receive the election forms within a certain time period. You should complete and return the forms promptly, and should contact the plan administrator directly if no forms have been sent within a month of the QDRO being served.
The Plan rules control when your benefits may commence. Most defined contribution plans allow an immediate lump sum distribution, although some plans require the former spouse to wait until the employee reaches (or would have reached) earliest retirement age.
If you roll the assigned benefit directly to an IRA or other eligible tax deferred plan, no taxable event is triggered, rather tax will be delayed to when you withdraw funds from the IRA or deferred compensation plan.
If you elect to take a lump sum distribution from the plan (instead of rolling it over to an IRA or other eligible tax deferred account) the distribution will be taxed as normal income, but as long as the plan is ERISA-qualified, there will be no early distribution penalty. https://www.irs.gov/taxtopics/tc558.html The plan administrator is required to withhold 20% toward your federal income tax obligation. It is not required to withhold income tax for the State of Connecticut. At the end of the year in which the distribution is made, you will receive a 1099-R showing the gross amount of the distribution as well as the taxes paid. The actual tax owed will depend on your tax bracket, as well as your deductions and other income.
Probably not. The ten percent premature distribution tax does not apply to distributions made from a qualified plan (such as a 401(k)) pursuant to a QDRO. IRC Sec. 72(t)(2)(C). Although the distribution will still be taxable income, and 20% will be withheld toward the federal tax obligation, no penalty applies. This may free up a source of funds for the divorcing parties. Be warned: this rule may not apply to executive or non-ERISA plans, and even if the plan is qualified, the penalty will apply if the client rolls the funds into an IRA, and then takes cash out. This is because the actual distribution (from the IRA) is neither from a qualified plan nor pursuant to a QDRO.
Yes! This works best, however, if the employee has a defined contribution plan that will make an immediate lump sum distribution, or a pension that is in pay status. Be aware that for child support, the distribution is taxed to the employee, rather than to the former spouse.
Yes. A pension in pay status can be divided by QDRO, but the form of benefit generally cannot be changed. This means you can assign a portion of each monthly benefit, but the plan administrator will not be able to actuarially adjust the former spouse’s share to be paid for the former spouse’s lifetime. Payments will end on the death of the employee or of the former spouse, whichever occurs first. If the employee elected a survivor annuity at retirement, the survivor benefit (with most plans) will remain in place. It’s a good idea, however, to specify in the decree that the survivor benefit is to remain, since pension plans that have a pop-up option may allow the employee to terminate survivor benefits upon divorce, thus increasing the monthly payment to the level that would have been paid under a single life annuity.
Yes! The former spouse could lose the entire benefit if the employee retires or dies before the QDRO is served on the plan administrator. Other concerns are:
The model orders are not meant to substitute for legal advice, and do not take into account all of the options available to the parties. Orders are frequently drafted for the convenience of the Plan Administrator, and may not contain options that would apply better to the judgment.
Neutrality: There are many issues relating to the division of retirement assets that are not addressed in the separation agreement. If the attorney drafting the QDRO represents one party, he or she might unconsciously draft the order in a way that favors his/ her client.
Transparency: I take pains to draft a neutral order that clearly addresses all of the issues. My orders will clearly state whether features such as cost of living adjustments (for a traditional pension) or investment experience (for a defined contribution plan) are included or excluded. If those features are not specified, many plans have a default interpretation that you might not have anticipated.
Expertise and Efficiency: My office deals almost exclusively with QDROs, which means I can prepare the QDRO more quickly and efficiently than most other lawyers. It can be time consuming and difficult to follow up with the plan administrators during the QDRO drafting and pre-approval process. QDROs may be relegated to the bottom of the attorney’s pile because the case has already gone to judgment, and there are other pressing files to deal with.