Sharing our Love with QDRO Tips
Roses are red, violets are blue. We love sharing QDRO Tips with you. This Valentine’s Day we are showing our love by sharing some QDRO Tips:
Earnings, Gains, and Losses are your Friend – The market is quite volatile now and has been for quite some time. Additionally, some 401k, 403b, and similar plans are taking longer than before to effectuate a division of such accounts. Including earnings, gains, and losses on a retirement transfer amount to a former spouse/alternate payee will make it seem like those funds had been in the former spouse/alternate payee’s name since the date the parties decided to value the account. Excluding earnings, gains, and losses on the transfer amount means the participant/account holder will enjoy (or suffer) all fluctuations due to market changes. Imagine, the account has $100,000 as of 2/14/2024 and the parties agree the divide it equally, excluding earnings, gains, and losses. The former spouse will always get $50,000 but if the market falls the participant will end up with less than $50,000 in the account after the transfer is complete. Since no one can predict what the market will do, including earnings, gains, and losses on the transfer amount ensure that both parties will be affected proportionally in such a transfer.
Remember the Survivor Benefit – When dividing a pension, it is important to remember there is a portion paid during the participant’s lifetime, and there is an optional portion that can be paid out after the participant’s death. To continue the payment after the participant’s death is called the survivor benefit. State law dictates whether the survivor benefit is treated the same as the payment made during the participant’s lifetime. It is best to address whether the former spouse will receive a share of the survivor benefit. In the event the parties are divorcing in a state that treats these as separate assets, failing to do so could preclude the former spouse from receiving the benefit at all.
You can Withdraw from Your IRA at age 59 ½ - With the retirement age creeping ever higher for access to social security funds, parties should remember they can access other retirement funds sooner. This can really help parties trying to plan for retirement while going through a divorce. Though, these clients may also benefit from the counsel of a financial planner.
Shared or Separate Pension Interest Division – Some pensions can only be divided such that the former spouse receives money only if, as, and when the participant receives money from the pension. If that’s the case, for the former spouse to receive payments after the death of the participant they will need to be awarded a survivor benefit. Some pensions may also be divided so that the former spouse can begin to receive payments when they choose, and have the payment made for their lifetime. There are sometimes complex actuarial considerations in this decision, but ultimately is a decision the parties need to make.
401ks can Fund Alimony and Child Support Arrears Payments – If a party does not have sufficient funds to pay alimony or child support arrears directly, a court order can be entered to make such payment from the obligor’s 401k. Such court order must specify the purpose of the payment is for alimony or child support (as opposed to division of marital property) so that the tax will be charged to the obligor rather than the payee.
Get Plan Documents Early – Too often parties agree to a division of retirement benefits, only to learn that the plan does not allow for their agreed-upon plan. The parties then have to go back to the negotiating table (or court) to find a new way forward. Getting the plan documents early allows the parties to move forward knowing their options so they know what they agree upon will be allowed by the plan.
Pick Your Title: QDRO, EDRO, or COAP – “QDRO” is a term of art defined under the Employee Retirement Income Security Act (ERISA). Not all retirement plans are governed by ERISA, however, and those plans do not like to use ERISA language. As such, they have adopted other preferred titles, such as Eligible Domestic Relations Orders or Court Order Acceptable for Processing. While some plans are particular about the title of these orders submitted to them, others are not. But it is important to know that picking the wrong name could result in a rejection, even if the rest of the order would otherwise be acceptable.
Some Plans are not Divisible – Plans governed by ERISA are required to be divisible by court order in some manner. For plans not governed by ERISA though, no division mechanism is required, and in fact, the plans can have a non-alienation clause prohibiting the transfer of the asset. Many of these plans are for highly compensated individuals such as partners and shareholders of large organizations. If the funds in these accounts are marital funds that should be divided, the parties will likely need to find some other asset to transfer instead.
If you have additional questions about QDROs, contact our office at 240-396-4373.
