A QDRO Can Protect Your Retirement Assets After Divorce

A Qualified Domestic Relations Order (QDRO) is an order that needs to be included in a divorce settlement agreement to provide former spouses their share of Erisa-qualified retirement assets. In order to receive your fair share of assets saved during the years you were married, a QDRO will ensure your rights under these retirement plans are fully protected. QDROs should be prepared by a qualified family lawyer who understands the tax implications and other consequences of dividing the full range of retirement assets.

Connie Buffington, a family lawyer with the Atlanta office of Boyd Collar Nolen & Tuggle, offered the following tips to  FOXBusiness.com on what divorced retirees need to know regarding their rights involving their ex-spouse’s employee benefit or pension plans.

Boomer: What are some of the costly mistakes when dividing retirement assets?

Buffington: There are three common mistakes when dividing qualified retirement assets (e.g. 401(k) plans) and non-qualified retirement assets (e.g. IRAs) during a divorce: not considering potential tax consequences and liabilities; not defining the method by which a traditional pension plan is to be divided; and not accounting for the treatment of investment gains or losses in the context of the division.

Boomer: When is a QDRO needed and when is it not needed?

Buffington: QDROs are required to divide assets held in ERISA-qualified plans in connection with divorce. They can also be used to facilitate alimony and child support payments.

They’re not required to divide IRAs or non-qualified plans, such as deferred compensation plans, supplemental pension plans, long-term incentive plans or stock ownership plans.

Boomer:  How would you craft a QDRO in order to avoid tax consequences?

Buffington:  The QDRO (which by definition, applies only to qualified retirement plans) should be written to provide that 100% of the alternative payee’s benefit shall be distributed or rolled over to an eligible retirement account designated by the alternate payee. As long as he or she refrains from requesting that all or part of the benefit be distributed in cash, the transfer of assets will not be taxed.

Boomer:  What happens to the QDRO when the ex-spouse dies?

Buffington:  What happens when the ex-spouse dies will vary with the specific terms of each qualified plan, making this a critical and complex issue that should be addressed by the terms of the QDRO.

For defined contribution plans, such as 401(k) plans, the order should provide that, in the unlikely event that the alternate payee dies prior to receiving the full intended benefit (and no other designation is in place), then the unpaid benefit shall be distributed to his or her estate. Further, the QDRO should provide that, if the plan participant dies prior to the transfer, then the alternate payee is to be treated as the surviving spouse for the amount of the intended benefit.

For defined benefit plans, including traditional pension plans, as a general rule, if the alternate payee dies prior to actually receiving benefits from the plan, then his or her intended benefit reverts back to the plan participant.

If the plan participant dies before the alternate payee, but after the alternate payee has started receiving benefits, then the plan participant’s death generally has no impact on the other spouse’s intended benefit. But, if the plan participant dies before the alternate payee’s benefits commence, then generally, the intended benefit granted by the QDRO will be extinguished and replaced by whatever “survivorship” options are preserved and allocated to the alternate payee by the terms of the QDRO.

Again, important survivorship protections for the alternative payee can be preserved or omitted by terms of the QDRO. So expert advice regarding this issue is critical.

Boomer:  What do financial planners need to know about QDRO’s?

Buffington: Financial planners should understand that the QDRO, while complicated, can be your client’s friend. It is a valuable mechanism to ensure the prompt transfer of retirement assets with the assistance of a neutral expert – the plan administrator – who is required by federal law to facilitate the transfer or rollover within a reasonable timeframe. Additionally, ERISA-qualified plans handle the calculation of investment performance by which all plan participants are treated alike, thereby providing transparency and relief for the financial planner for responsibility of this task.

Boomer:  How do you account for gains and losses several years after the divorce decree?

Buffington: Plan administrators of ERISA-qualified plans generally have the ability and the data to calculate investment performance for many years after the divorce. A rollover of the assets held by the plan from one financial institution to another sometimes frustrates this task. If the plan terms and the available data permit the plan administrator to calculate the investment performance, the plan administrator always prefers to perform the calculation. If the data for the relevant timeframe isn’t available, the plan terms often provide for a “default” formula. Absent a “default” formula, the parties must reach an agreement on their own. If that is not possible, the court is likely to require the payment of interest on the alternate payee’s intended benefit at the legal rate that applies to unpaid debts.