Reaching Retirement Plan Assets During Divorce
Divorce is one of a handful of commonly encountered situations that affect retirement planning. And when it comes to divorce and retirement, the ways that courts split retirement plan assets are sometimes determined by the type of retirement planning you and your spouse have done.
Once the value of an employee's interest in a qualified retirement plan is determined and a decision is made on how to divide the assets, it is still necessary to have the order drafted in a way that complies with the extensive regulations applicable to qualified employer-sponsored retirement plans. To protect an employee's retirement security, a retirement plan subject to the Employment Retirement Income Security Act (ERISA) must, by its terms, prohibit the assignment or alienation of the benefits provided by the plan. The Internal Revenue Code also requires that a plan contain an anti-assignment clause to qualify for tax benefits under the Code.
All or part of your interest in an employer-sponsored retirement plan may be transferred to your spouse if the transfer is made under a qualified domestic relations order (QDRO). A QDRO is a court order, judgment, or decree issued pursuant to an applicable state domestic relations law that relates to child support, alimony, or property rights of a spouse or former spouse, child, or dependent of the participant.
To qualify as a QDRO, all of the following criteria must be met:
- The instrument must be a judgment, decree, or order of a court (including an approval of a property settlement agreement) that meets these two requirements:
- relates to the provision of child support, alimony payments, and marital property rights of your spouse, child, or other dependent
- is made pursuant to your state domestic relations law, including a community property law
- The domestic relations order must create or recognize the existence of an alternate payee's right to receive, or it must assign to an alternate payee the right to receive, all or a portion of the benefits payable to you or payable on your behalf; the term alternate payee means your former spouse, child, or other dependent who is recognized by the order as having a right to receive all or part of your benefits under the plan
- The order must not do any of these:
- require the plan to provide any type of benefit or any option not otherwise provided for in the plan (however, an exception exists for early retirement benefits)
- require the plan to provide more benefits (determined on the basis of actuarial value) to the alternate payee than you would be entitled to
- require the plan to pay one alternate payee benefits that are required to be paid to another alternate payee under another order previously determined to be a QDRO
- The order must clearly specify all of the following information:
- your name and last known address (if any) and the name and mailing address of each alternate payee covered by the order
- the amount or percentage of your benefits to be paid by the plan to each alternate payee, or the manner in which such amount or percentage is to be determined
- the number of payments or the period to which the order applies
- the name of each plan covered by the order
A plan administrator is required to determine whether a domestic relations order is a QDRO within a reasonable time after the receipt of the order and is required to notify you and each alternate payee of the determination. Every plan is required to have written procedures for making these determinations, and these written procedures should be available to you.
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Warning
A failure to meet the requirements for a QDRO could result in a situation where the plan participant is forced to include in income (and therefore pay tax on) amounts already paid to a former spouse. You would be well advised to ensure that the court entering the order retains jurisdiction over the matter, so that the order can be amended or clarified if it fails to meet the requirements of a QDRO.
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Here are some additional issues to consider:
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