When a marriage ends, all marital property must be divided equitably amongst both spouses. While often overlooked, retirement benefits accumulated in the course of the marriage are also considered part of that property. This means an ex-spouse can be entitled to a portion of the former spouse’s retirement plan. Simply agreeing to split a qualified retirement fund is not sufficient to ensure that this is actually done. An order must be drafted to ensure that the retirement administrator honors the marital settlement agreement or court order. The order that specifically provides for this is what is known as a qualified domestic relations order (QDRO).
A QDRO is not something you want to tackle yourself, as mistakes can be costly down the road. If you are in the midst of a divorce and are concerned about the handling of a qualified retirement or pension fund, you should speak with a taxation attorney experienced in drafting qualified domestic relations orders.
What Is a QDRO?
A QDRO is a decree or order recognizing another person such as a former spouse, child or dependent as an “alternate” or “alternative” payee to a retirement plan. The alternative payee can receive all or part of the benefits under the plan.
QDROs were established under federal law, specifically the Employee Retirement Income Security Act (ERISA), as an exception to the rule that a person’s retirement plan should not be assigned.
It Is Not a Domestic Relations Order
A domestic relations order is not necessarily a QDRO. A domestic relations order is issued by a court, or a state authority, with the mandate to make orders and decrees, or to execute marital settlement agreements. This means the court or state agency can either make an order or decree dividing the retirement plan or it can execute a plan developed by the divorcing parties, drafted by an attorney and approved by the pension plan’s administrator.
For the domestic relations order to qualify as a QDRO, it must meet a number of requirements. It must include:
- The names of the participant and alternate payee
- The mailing address of the plan participant and alternate payee
- The amount or percentage payable to the alternate payee
- The number or time period for the payments made to the alternate payee.
The domestic relations order must not:
- Require a plan to provide an alternate payee with a benefit or option not provided for in the plan
- Require a plan to pay increased benefits
- Require a plan to divert payments from one alternate payee in a previously approved QDRO to a new alternate payee
- Require a plan to pay the ex-spouse and his or her future spouse qualified joint and survivor annuity benefits for the rest of their lives.
QDROs Must Be Carefully Crafted
There are many considerations that go into creating a QDRO. One is the type of plan involved. Is it a defined benefit plan where the employer provides funding directly? Or is it a defined contribution plan, where the employee personally contributes?
Additional considerations include how the plan will be divided. Will it be by separate interest where the participant and alternate payee make their own plan elections such as when to begin receiving retirement benefits? Or by shared payment where the alternate payee gets a fixed share of the participant’s benefits?
There are many factual issues to take into account when it comes to splitting one’s nest egg. Avoid jeopardizing your future income by talking with experienced taxation and estate planning lawyer Stephen Thienel. Mr. Thienel has decades of experience assisting clients in developing qualified domestic relations orders in Maryland, Virginia, and the District of Columbia.
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