Qualified Domestic Relations Order (QDRO)
What is a Qualified Domestic Relations Order (QDRO)? If you are facing the prospect of divorce and are worried about how much of your pension your spouse can claim, we have answers.
Can my spouse take a portion of my pension in divorce?
Simply put, it is likely if a portion accrued during the marriage and is not offset against other marital assets. People are often surprised to learn that a pension or retirement account, while usually in an individual’s name and made through their own hard work, is considered marital property, or at least the portion of the retirement account that is accrued and contributed to during the marriage. During a divorce, or “dissolution of marriage” in Florida, each spouse is entitled to an equitable distribution of the marital property. Section 61.076(1) of the Florida Statutes specifically provides that “all vested and non-vested benefits, rights, and funds accrued during the marriage in retirement, pension, profit-sharing, annuity, deferred compensation, and insurance plans and programs are marital assets subject to equitable distribution.”
Thus, a spouse is typically entitled to at least a portion of the pension, 401(k) or Individual Retirement Account (IRA) of the other spouse, keeping in mind a number considerations and factors (for example, the length of the marriage and the length of time the spouse accumulated the benefit during the marriage). Once the amount of the entitlement of a spouse’s pension plan is established, the next step is to consider mechanisms available for the non-participating spouse to get his/her portion of the participant (participant in the pension plan/account) spouse’s pension benefit.
Equitable Distribution Schedule
Although many factors must be considered is distributing the divorcing spouses’ marital assets and debts Section 61.075(1) provides that the beginning point is “with the premise that the distribution should be equal, unless there is a justification for an unequal distribution based on all relevant factors…” as listed in that section. The least intrusive way to distribute the parties’ assets is to distribute the assets to the parties “in kind” so as not to disturb the integrity of an asset through distribution. In a simple example:
Mr. and Mrs. Smith own three marital assets consisting of 1) a joint checking account with a balance of $50,000, 2) Mr. Smith’s vintage Corvette with a value of $80,000 and 3) Mrs. Smith’s 401(k) with a net value $60,000 (since income taxes have not yet been paid on the money used to fund the 401(k), the balance of the IRA is higher than $60,000 and has been tax effected) resulting in a marital estate valued at $190,000. Equally dividing the marital estate results in each party receiving one half of $190,000 or $95,000. In this example it is conceivable that an equitable distribution schedule be developed so that each party receives his/her share of the marital assets ($95,000) without disturbing the integrity of any of the assets. Therefore, Mrs. Smith would keep her IRA ($60,000) plus $35,000 from the joint checking account and Mr. Smith would keep his Corvette ($80,000) plus $15,000 from the joint checking account. Neither the IRA nor the Corvette need to be liquidated or sold.
What is a Qualified Domestic Relations Order (QDRO)?
What if the composition of marital assets is such that each party cannot get his/her share without disturbing the integrity of an asset? Let’s change the above example whereby the marital assets consist of 1) the joint checking account with a balance of $10,000, 2) Mr. Smith owns an old pick-up truck worth $2,000, and 3) Mrs. Smith still has the 401(k) with $60,000. This results in a total marital estate of $72,000 with each party coming out of the marriage with $36,000. Both of the Smiths need some cash as a reserve so they agree that they each will get $5,000 from the joint account and Mr. Smith will keep his truck. In order for each of the Smiths to receive his/her share ($36,000), $29,000 would be transferred to Mr. Smith from Mrs. Smith’s 401(k) through entry of a Qualified Domestic Relations Order commonly referred to as a QDRO.
A QDRO is a court order that creates an interest in a plan participant’s retirement plan or retirement account (Mrs. Smith) to the non-participant ex-spouse (Mr. Smith). The person who earned the benefit is known as the “participant” and the spouse, former spouse, child, or other dependent of the participant recognized by the order has having a right to receive all or a portion of the benefits to be paid under the plan is known as the “alternate payee.” In short- the “participant” is the individual in the retirement plan, and the “alternate payee” is the person(s) who has a recognized right to be paid the benefits.
In the Smith example, a QDRO would be prepared that would provide that $29,000 would be segregated from Mrs. Smiths’ 401(k) into a new account designated for the alternate payee (Mr. Smith). Once the judge in the divorce case enters the QDRO, it is sent to the plan administrator for acceptance. Essentially, the retirement plan is split into two accounts, thereby not penalizing either party for withdrawing funds without penalty, as well as each party being able to name their own beneficiaries. Further a QDRO may not require a plan to provide any benefit not otherwise provided for under the plan, nor does it require the plan to provide greater benefits to either the participant or non-participant than the benefits accumulated in the plan.
The best practice is to submit the QDRO to the plan administrator for pre-approval prior to submitting it to the Court for entry. It becomes “Qualified” when the retirement plan administrator accepts the court-issued domestic relations order which is then processed by the plan administrator and the non-participant gets their share directly from the plan.
It is important to note that not all pensions can be divided through entry of a QDRO. Most municipal pension plans contain anti alienation clauses forbidding the distribution of the plan’s funds to anyone other than the participant. If an equitable distribution plan can be formulated whereby the non-participant receives his/her share from the other marital assets (as in the first example with the Smiths) the problem is solved. If not, other creative measures to insure the non-participant spouse gets his/her share must be taken such as the entry of a QDRO like order whereby the participant receives the entire benefit from the plan and is ordered to pay the non-participant his/her share directly from the participant spouse.
Is a QDRO necessary to divide ALL retirement accounts?
QDROs are used to divide benefits that are accumulated in qualified plans. A qualified plan is one that follows the requirements of the Employee Retirement Act of 1974 (ERISA). ERISA is a federal law that governs most retirement plans in private industry, which was meant to provide some protection for individuals in these plans. Funds paid into a qualified plan are not subject to income tax until the funds are removed at a later time, usually at the time of the retirement of the participant.
Individual Retirement Accounts (IRAs) are not qualified plans and funds in an IRA can usually (but not always) be transferred to a divorcing spouse without the necessity of a QDRO. A transfer in that instance is usually through transfer of funds from one divorcing spouse’s IRA to the other spouse’s IRA commonly referred to as an IRA to IRA transfer.
Military, state and federal retirement plans are also not ERISA plans, but do accept a functionally equivalent court order (similar to a QDRO) to divide their retirement plan. Simply because a plan may not accept a QDRO does not, nor should not, imply that a spouse is not entitled to benefits. The issue of entitlement is left to the states, or more specifically the domestic relations laws of each state. The issue as to what a spouse may be entitled to is not in the plan, and other avenues must be explored to achieve an equitable distribution in such circumstances. As retirement plans and retirement accounts tend to be one of, if not the largest, marital asset, a knowledgeable attorney in this area is essential for your divorce.
Divorce can be an emotional and complex process. When it comes to asset division, your rights and future financial well-being should take top priority. Unfortunately, drafting and filing a QDRO often requires technical knowledge, and this is not something you want to leave to chance. The office of Robert D. Burgs, Esq., handles complex family law cases that involve complicated financial issues.
If you are going through a divorce and need assistance with obtaining and implementing a QDRO contact our office now to schedule your initial consultation.