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:
Since ERISA trumps state law, there are some things that the QDRO cannot include, such as:
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
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:
SUMMARY
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.
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