QDROs & Pension Plans

QDROs & Pension Plans FAQs:

Regarding retirement plans and investment accounts, what a QDRO is and how is that divided in a divorce case?

A QDRO is a qualified domestic relations order. If you work for a company that has a retirement plan and it is being divided in a divorce case, in addition to the divorce decree, you will have to get a qualified domestic relations order signed by the judge.

More importantly, not only does it have to be signed by the judge, it has to be approved by the company. Many companies these days have their own forms, especially if you are dealing with large corporations. They want you to use their form, so you need to make sure that you receive confirmation that the company has accepted it.

Once the company accepts the order from court, they will segregate the funds for the non-participating spouse into their own account, and that becomes their account and they can either leave it there or they can roll it into a different retirement plan that they might have. If you don’t do the Qualified Domestic Relations Order, that money will sit in the account of the spouse that works there, until the QDRO is approved.

I’ve seen cases where, many years later, a person is trying to get their funds out of their former spouse’s business and they find out that the QDRO wasn’t approved. They have to end up going back to court to try and get that accomplished. It becomes a little bit more difficult at that point.

Are spouses always entitled to a share of the other spouse’s pension plan?

Generally speaking, yes. It is a community asset. There are formulas you can refer to in terms of determining what the community interest is of that retirement plan.

There are rules that pertain to certain types of pension plans that make it somewhat more cumbersome. For instance, if your spouse is in the military, there are specific rules that apply to division of military retirement. That becomes complicated because, while the state law would allow that military retirement plan, there are specific rules of whether or not you can get direct payment from the military. You have to meet certain requirements, and if you don’t, then you don’t get the direct payment and you have to go about it in a different manner.

So, the simple answer is yes, it is divisible. And the complex answer is that it depends who they work for, and if there are there any rules that come into play about how they ultimately access the funds.

When you consider the overall financial picture of the couple, does it sometimes makes sense that one of the spouses would get a higher percentage of the pension plan?

Yes, especially in cases with larger estate, where there are a number of different assets. Often, you look at the spreadsheet and look at the client’s estate to determine if there are assets that are not retirement plans, and if they would get a larger percent of the liquid assets in exchange for giving up a percentage of the spouse’s retirement fund. I see this in cases where I have a client who is in their forties or fifties and the spouse is not going to immediately access a 401(k) or a simplified plan without some substantial penalty or tax consequence.

So, I look to see if there are other assets, maybe a house that is going to be sold, or other bank accounts, or stock accounts that don’t have the same tax consequences as the retirement accounts.

One mistake that attorneys make when they are looking at pension plans, 401(k)s, or stock accounts is not considering which type of asset the account’s invested in. If you don’t try to determine what the basis of the account is, you could end up giving your client an asset that has higher tax consequence than the asset the other side is getting. You have to take it all into consideration.

Often, we will consult with financial planners and CPAs. We will have them look at the breakdown of the investment and determine if, hypothetically, a client would have to liquidate a portion of their stock account for the next two years, what is the potential capital gain, what taxes are they going to have to pay associated with that liquidation versus getting some other asset?