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Retirement Benefits & Qualified Domestic Relations Orders

Retirement benefits can become a point of contention during divorce proceedings. Many people feel that their retirement benefits belong to them and only them as retirement funds are held in only one person’s name. The courts, however, do not necessarily consider a retirement account to only belong to one person in a marriage. That is, of course, depending on the circumstances. If a couple has been married for several years and funds have been put aside in a retirement account during that time, then the other spouse is entitled to a portion of those retirement benefits because they are considered to be marital property. On the other hand, if a spouse enters a marriage with a large retirement account, then the other spouse may not be entitled to the pre-marriage portion. If a spouse is entitled to a portion of the retirement benefits, a judge will enter a Qualified Domestic Relations Order (QDRO) to establish an additional payee on the account per the US Department of Labor. It should be noted that a QDRO is only to be used for company-managed accounts like a 401(k) or 403(b). The order does the following:

  • Creates or recognizes an alternate payee’s right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant’s retirement plan.
  • Clearly specifies the name and last known mailing address of the participant and the name and mailing address of each alternate payee that the order covers. The amount to be paid to the alternate payee, how that amount was determined, the number of payments or the period of time the order applies, and, if more than one retirement account is in question, it names each retirement plan the order applies.
  • The order does not require there be any other types of payment options other than what is available under the plan nor does it require the plan to provide increased benefits.

A word of caution if you are on the receiving end of the QDRO, if you receive a cash payment for the retirement benefits, you may be liable for taxes unless you reinvest it according to tax laws. If you are on the paying end of the QDRO, a bit of good news is that you will be protected from an early withdrawal tax assessment from the IRS.

Retirement accounts are among some of the most commonly divided assets in today’s divorce cases. In some instances, the Internal Revenue Service can use the QDRO to identify that the retirement assets are legally allowed, and sometimes mandated, to be used to pay child support or alimony. As with all legal documents and proceedings it is best to seek legal counsel, but it is especially important when creating a Qualified Domestic Relations Order. There are right and wrong ways to execute one. If it is done correctly, you will have great protection from the IRS, but if done incorrectly you may end up with no protection. Kevin Hickey Law Partners strives to help every client achieve the best divorce settlement possible. For example, when preparing QDROs we name protected provisions in the event that one spouse dies. If an alternate payee dies before receiving all of the money they were allotted as part of the QDRO, the order should stipulate that the remaining distributions be paid to his or her estate. If the retirement plan owner dies before all money is paid to the alternate payee, the alternate payee spouse should be identified as the surviving spouse for the purposes of that particular retirement account. Call Kevin Hickey today to schedule your consultation before starting the divorce process.