Dividing Retirement Plans After a Divorce

In general, retirement plan benefits including 401(k) plans, profit sharing plans, pensions plans, and other Internal Revenue Code 401(a) qualified plans are not assignable or attachable by creditors or others under Internal Revenue Code Section 401(a)(13).  The Retirement Equity Act of 1984 changed this on January 1, 1985 by creating a right to assign retirement benefits to persons other than a plan participant.  The Law created the term “domestic relations order” which it defines to be any judgment, decree or order, including a property settlement agreement relating to provisions of child support, alimony payments or marital property rights to a spouse, former spouse, child or other dependant of a participant, and is made pursuant to a State domestic relations law, including community property laws.  These same benefits were extended to governmental plans, church plans, deferred compensation plans under Internal Revenue Code Section 457(b), and Internal Revenue Code Section 403(b) plans.  The Code Section does NOT apply to US Government Plans including military retirements, which have a separate Federal Statute called the former Spouses Pension Protection Act passed in 1985.  Thus, most retirement plan benefits are subject to assignment by a court made pursuant to a State domestic relations law for a spouse, former spouse, child or other dependant of a participant.

While a mechanism exists to allow assignment to a participant’s retirement plan benefits there is no one size fits all to achieve the goal of receiving funds from a participant’s account.  Each plan is allowed to have separate rules regarding how it administers and interprets the rules therefore, it is critical for each person who will be receiving funds from a retirement plan to have a proper order drafted by an experienced attorney familiar with that specific plan’s requirements so the supplemental order meets the plan’s specific rules, so the order is deemed to be a Qualified Domestic Relations Order (QDRO).  The proper term for a US Government FERS benefit is a Court Order Acceptable for Processing (COAP).  The Thrift Savings Plan is a TSP order, and a military benefit is sometimes referred to as a QMCO or a military order.  All retirement plans including 401(k) plans, profit sharing plans, pensions plans, and other Internal Revenue Code 401(a) qualified plans have administrative rules regarding so called QDRO’s which must be met for such domestic relations order to be deemed qualified.  Each state or local governments have even more specific rules for such domestic relations order to be deemed qualified.  These may include requiring the domestic relations order to be filed in the requisite state where the plan is located in order for the order to be qualified.  Knowing these rules and adhering to them is critical for the party who is going to receive funds from the participant’s account.  This person is generally referred to as an alternate payee for plans subject to the QDRO requirements.

US Government COAP’s, TSP’s and QMCO orders have extensive guides for attorneys to use in drafting these types of orders.  Again, it is critical to follow them in drafting up properly drawn orders because if the order is not drawn in accordance with the requirements it will be rejected by the appropriate agency which will delay the persons receipt of benefits or possibly cause more serious consequences.

Another issue arising out of the bifurcation of retirement benefits is when will the alternate payee receive funds from the plan, and more importantly for how long.  This issue depends upon the type of plan and the method of splitting up the retirement benefits.  Generally defined contribution type plans where there is an account balance reported as a single dollar amount are usually payable immediately to the alternate payee after an appropriate time period to review the order and adjust for earnings or losses, fees, etc.  In addition, most defined contribution plans will allow the alternate payee to designate beneficiaries to receive funds from the plan in case of their death prior to receiving their entire interest assigned from the plan.  A much bigger issue is found in defined benefit plans, especially governmental plans from states, municipalities, and the US Government.  It is called a separate interest QDRO versus a shared interest QDRO.  A defined benefit plan promises a monthly benefit amount calculated in accordance with some type of formula payable at a stated age.  A separate interest QDRO will split off a piece of the participant’s benefit permanently in favor of the alternate payee.  The amount toe alternate payee receives is usually adjusted for the alternate payee’s age, and once the split off benefit actually commences to the alternate payee it is gone forever from the participant.  This separate interest QDRO is preferred because it is not tied to or connected to the participant.  It allows the alternate payee to pick a different benefit starting date not tied to the participant and may allow a different form of benefit payment.  It also will usually continue on because it is usually based upon the alternate payee’s lifetime not the participant.

The shared interest QDRO is usually found in state or municipal retirement benefits, including COAP and military orders.  It ties the alternate payee’s benefit to the participant’s benefit including when it begins, how long it is paid, and if there are any survivor benefits payable to the alternate payee if they survive the participant.  In addition, if a QDRO order occurs after the participant retires almost all plans use the shared interest approach which utilizes the form of payment elected by the participant at retirement, including survivor benefits, if any.  This has the effect of putting alternate payees into a very tight box because of the inability to make elections regarding the benefit.

A further limitation on defined benefit plans is when the benefit may commence.  In general, a participant has to be eligible for early retirement for most defined benefit plans to commence monthly payments if a participant is employed by the plan sponsor.  There are other rules which might allow earlier payment if the participant terminated employment prior to that early retirement date.  In general, if a participant dies prior to being eligible for early retirement, there is usually no benefits payable from the plan even if a separate interest QDRO was in place.  Additionally, if an alternate payee dies before commencing benefits the plan may have such benefits forfeited back to the participant. These rules are in accordance with federal retirement benefit laws, rules and regulations, plus various federal and state laws. 

With all of these different laws, regulations and rules, it is imperative for participants and potential alternate payees to engage competent counsel in the negotiation stage, the decree of divorce, legal separation, property settlement agreements, or marital settlement agreements.  It is important to acquire various plan documents, benefit statements, etc. in the discovery phase to be able to properly negotiate for your client to achieve a good result.

          Las Vegas QDRO can assist with all of your pension and retirement needs.  Las Vegas QDRO prides itself on offering the best possible customer service.  Las Vegas QDRO does not have voicemail and you will always talk to a person.  Call Las Vegas QDRO for a free price quote.

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