In Focus: Qualified Domestic Relations Orders
One of the largest assets for many divorcing couples is a retirement plan, and it is crucial not to overlook such assets when dividing the marital property. While a spouse has a right to a share of the benefits earned in the other’s retirement plan, enforcing these rights requires a skilled divorce attorney to prepare a Qualified Domestic Relations Order (QDRO).
How does a QDRO work?
In a divorce, the court may issue domestic relations orders regarding matters such as property division, child support or spousal maintenance. A Qualified Domestic Relations Order (QDRO), on the other had, is a specific type of court order approving a property settlement agreement that involves a retirement plan.
In short, such an order awards an individual the right to a portion of the former spouse’s retirement benefit. QDROs are applicable to both retirement plans under the Employee Retirement Security Act (ERISA), such as a 401(k) plan, as well as Individual Retirement Accounts (IRA). It is worth noting that different types of orders apply to plans for municipal, state and federal employees.
Preparing a QDRO
A QDRO form must be obtained from the plan administrator and include the following information:
- The names and addresses of the plan participant and alternate payee (the spouse who earned the benefit is the participant; the individual receiving a share of the benefit is the alternate payee)
- The name of the plan
- The amount or percentage of the benefit to be paid
- The method used to calculate that payment
- The number of payments to be made or the time period covered by the order
While a court can issue a domestic relations order, it only becomes “qualified” after the plan administrator has accepted it. Because each plan is different, specific language must be included in the QDRO. If the administrator rejects the order, a new one needs to be submitted for approval and filed with court. Finally, both parties and the presiding judge must sign the order.
How are benefits awarded under a QDRO paid?
Once the order is qualified, the plan administrator is responsible for transferring the designated amount to the alternate payee. However, the participant must be vested in, or receiving the benefits, on the date the divorce is filed. Moreover, the alternate payee does not receive his or her share until the participant begins receiving benefits or reaches 65 years of age. Finally, payout from a QDRO can be rolled over into another retirement plan tax free, however, there are tax consequences once distributions are taken.
Even though a spouse has a right to a portion of the benefits in the other spouse’s retirement plan, those benefits will be forfeited if a QDRO is not prepared. This is why it is important to have proper legal representation. If you need assistance preparing a QDRO or have any other questions about dividing marital assets, call Blair H. Chan III, PLLC today.