Qualified Domestic Relations Orders, commonly referred to as “QDROs,” are one of the least discussed topics in Family Court cases, but they are important. A QDRO is a type of court order that allows the transfer of retirement benefits from one spouse to another as part of the couple’s divorce.
There are a few key things you should know about QDROs.
1. QDROs Are Created by Federal Law
The Employee Retirement Income Security Act of 1974, commonly referred to as “ERISA,” established minimum standards for pensions and retirement plans and addresses tax consequences related to such plans. ERISA applies to two types of retirement plans: defined benefit plans and defined contribution plans.
A pension, which pays out a monthly amount upon retirement, is considered a defined benefit plan. Defined contribution plans include 401(k), 403(b), employee stock ownership plans, and profit-sharing plans.
2. The Type of Plan Matters for Determining Whether a QDRO is Needed
For many couples, retirement assets make up much of their marital estate. As part of a divorce, the couples’ assets are equitably divided between them.
To properly divide retirement accounts, it is important to understand the differences between defined benefit plans and defined contribution plans. You also need to know whether the benefits of the plan have vested or, if not vested, when they will vest.
Each of the details affects the valuation of the retirement asset and how a QDRO dividing it should be prepared.
3. QDROs Allow Tax-Free Transfers Between Spouses
Most transfers of retirement funds are subject to taxes; however, for ERISA-compliant plans, transfers between spouses incident to divorce are tax-free when accomplished by a QDRO. It is rarely a good idea to transfer retirement funds without a QDRO because of the tax consequences.
4. Transfer Terms in QDROs Must Be Clear
When negotiating a resolution to your divorce, the terms agreed upon must be appropriate for the type of retirement asset and reflect the parties’ intent.
For example, if a husband has a 401(k) with a value of $500,000, and the parties agree that a portion of the funds should be transferred to the wife, there is a difference between transferring $250,000 of the funds and transferring 50% of the funds to her.
Likewise, with a pension plan, the parties should agree on whether they will continue to have a shared interest in the benefit or separate interests.
In case it was not complicated enough, the company that holds the asset (referred to as the “Plan Administrator”) must approve the QDRO for it to take effect. If an agreement’s terms are incorrect, the Plan Administrator may reject the QDRO.
5. QDROs Are Not Used for Military Divorces
Though QDROs are used to divide other retirement assets, they cannot be used to divide military retirement benefits. Instead, the Defense Finance Accounting Service has its own detailed requirements for dividing military retirement benefits.
If you are facing divorce and need to address the division of retirement assets, our attorneys can help. Schedule a consultation to find out more about how QDROs might be used in your divorce case.
Do you feel overwhelmed by the prospect of divorce?