Divorce is an unfortunate part of many marriages. It often doesn’t come as a surprise, but it’s still difficult to plan for. The emotional toll that a divorce takes is likely the most painful, but the monetary component of divorce brings challenges of its own. Divorce can be expensive and complicated especially considering that the two parties are splitting their lives and property, not to mention time with their children. Among the property to be split in a divorce are the retirement plans. The retirement plans are put on the table along with all of the other property; then that table is cut into two pieces. Whether the plan is all on one side of that proverbial table, split exactly in two, or split in some other portion it is nevertheless a part of the process.
I don’t know if it’s because the economy is recovering, but here at Benefit Resources we have seen an increase in divorce proceedings in the past six months or so. Participants in the plans we administer often call us to ask about the process for pulling funds out of their retirement plan as part of their divorce settlement. Sometimes the attorney or paralegal calls us too. While we do not practice law, we do have some helpful guidance for people who are asking for information about how to go about splitting their retirement plan account due to a divorce.
If you are a plan sponsor and find yourself searching online for information to help you deal with aspects of your retirement plan like QDROs, it may be an indication that you do not have the right kind of relationship with your TPA. Learn more about how we can help you handle all aspects of your plan by requesting a consultation here.
WHAT SHOULD BE DONE FIRST WHEN IT COMES TO SPLITTING MY RETIREMENT PLAN IN A DIVORCE?
The first notification we get as the Third Party Administrator of a retirement plan is a notification from one of the divorce attorneys indicating that the plan is to be “joined” in the divorce action. That means that the plan is involved in the property of the couple getting divorced. Even though retirement plans are subject to federal law (ERISA) and not state law, we acknowledge that we have received the joinder notification and essentially “freeze” the participant’s account from withdrawals until we get the final instructions about how to split the value of the funds in the plan.
WHAT OFFICIAL PAPERWORK MUST BE PROVIDED TO SPLIT THE PLAN IN THE DIVORCE?
The technical term for divorce paperwork is a “Domestic Relations Order” or DRO. A DRO is a judgment or order issued by any state court or agency with jurisdiction to approve property settlement arrangements including community property law. The DRO can relate to the division of marital property rights, or child support or alimony payments for the benefit of an “alternate payee” (i.e., spouse, former spouse, child or other dependent of the plan participant). A DRO on its own, even if signed by both parties, is not sufficient to process payment from the retirement plan. The DRO must be considered a Qualified Domestic Relations Order or QDRO, and be signed by the court or agency through which the divorce is processed before any funds may be released from a qualified retirement plan.
WHAT IS A QUALIFIED DOMESTIC RELATIONS ORDER, OR QDRO?
A DRO that satisfies the requirements of the Internal Revenue Code (§414(p)) and ERISA (§206(d)) can be considered a QDRO. To be a QDRO the order must satisfy the following requirements:
- It must relate to marital property rights, property settlement, child support or alimony payments
- It must be made pursuant to state domestic relations laws including community property law if applicable
- It must include the name and mailing address of the plan participant and the “alternate payee” covered by the order (the person(s) to be receiving payment from the plan)
- It must include the name of the plan(s) involved
- It must include the dollar amount or percentage of the participant’s benefits to be paid to the alternate payee
- It must include the number of payments or the period to which the order applies
Since ERISA trumps state law, there are some things that the QDRO cannot include, such as:
- It cannot require a form of benefit or payment option that is not authorized by the plan
- It cannot instruct the form of payment to be made in the form of a qualified joint and survivor annuity
- If the plan assets were already assigned to another payee in a previous QDRO, those benefits cannot be awarded to the alternate payee under the current QDRO
WHO IS ELIGIBLE TO BE NAMED AS AN ALTERNATE PAYEE IN A QDRO?
The alternate payee under a QDRO is limited to the plan participant’s
- Former spouse
- Child (or legal guardian of that child)
- Other dependent
CAN THE COURT ONLY ISSUE A QDRO IN A DIVORCE PROCEEDING?
No, a QDRO that provides for child support or marital property rights may be issued without a divorce. For example, child support may be ordered without a divorce for parents who do not live together, or after the death of a plan participant.
WHO DETERMINES WHETHER AN ORDER IS A QDRO?
The Plan Administrator (plan sponsor) is officially responsible for determining whether an order received is a QDRO. As part of this requirement, we recommend that policies and procedures be put in place by the plan sponsor to outline the process for review and payment of benefits requested under a QDRO. Click the respective links to download a sample QDRO procedure and checklist for plan sponsors from Benefit Resources.
BEFORE I VISIT MY ATTORNEY TO DISCUSS DIVORCE WHAT SHOULD I DO?
If you are a plan participant with a retirement account, and are contemplating divorce, there are a few things that I recommend that you do to prepare:
- Read your Summary Plan Description for any plans that you have. The SPD should be dated 2009 or later. Ask your HR department for a copy of the most recent SPD.
- Review the provisions in the SPD about benefit payments. There should be reference to QDROs in the SPD. Timing of payments is also important. If as a participant you will not be eligible for payment under the plan until you terminate service or reach retirement age, then your plan may have similar restrictions to payments under a QDRO.
- Understand the benefits for which you are eligible. Check your vested balance if you have a defined contribution plan. If you are a participant in a defined benefit pension plan, find out the Present Value of your Accrued Benefits. Determine whether the pension plan account be distributed in a lump sum under the QDRO, or will your alternate payee receive a share of monthly benefits paid to you at retirement. Benefits that don’t begin until retirement will likely be viewed differently during the property settlement than benefits that can be paid fairly quickly after the agreement is reached.
- Benefits that you earn under your plan after you separate (even before the divorce) are often excluded from the QDRO. Determine the balance in your accounts as of the date of separation as much as possible.
As a TPA firm that helps Plan Administrators to perform their fiduciary duty, at BRI we are often asked to help process payments from the retirement plan under a QDRO. Often the orders are fairly straight forward, but others are very complex. We encourage our clients to retain ERISA counsel to review the orders that they receive to insure that they are indeed a QDRO if there is any question about the requirements.
An experienced divorce attorney is well versed in the drafting of QDROs. For those couples who go through a no-fault or do-it-yourself divorce process the QDRO process may not be included. In that case they may end up needing to hire a paralegal or attorney to assist in the drafting of the QDRO. View the Department of Labor’s FAQs about QDROs here.
If your TPA does not provide you with the kind of support you are looking for when it comes to processing QDROs or other nuances about your plan, please consider switching to BRI. It is our ultimate goal to stand shoulder-to-shoulder with you with respect to all things related to your plan. Your plan is our plan, and we will help you meet those fiduciary duties. Click here to have one of our plan consultants contact you to learn more about our TPA services.
You might also like:
The Dangers of a DIY Retirement Plan
Pension Administration - Top 5 Best Practices for Employers
Image courtesy of David Castillo Dominici / FreeDigitalPhotos.net