QDROs: Dividing Retirement Accounts in Divorce

You probably didn’t count on a divorce when you first started funding your retirement account or accruing benefits under your pension fund. But life is full of surprises, not all of them pleasant, and now you’re facing a divorce. Perhaps you suspect that splitting retirement assets with your spouse after a divorce is more difficult than it seems. You’re right. Indeed it is deceptively complex. Navigating this complexity is what QDROs are all about.

Equitable distribution and North Carolina divorces

When a couple divorces, North Carolina courts use the principle of “equitable distribution” to divide marital assets between divorcing spouses. The equitable distribution principle differs from the community property principle used in some states in that courts put more priority on fairness rather than equality. In other words, a distribution of marital property can be fair even if it is not equal. In community property states there is more emphasis on equality.

A couple can divide the assets of a retirement account by mutual agreement or by court order. Either way, the presence of distribution instructions in the divorce decree is subject to certain problems that a “QDRO” (Qualified Domestic Relations Order)” can solve.

The legal access problem

So your divorce decree entitles you to a certain percentage of your spouse’s retirement account. You might think that you could just look up the account administrator, show them a certified copy of your divorce decree, and thereby make necessary arrangements to have part of your spouse’s retirement account transferred to you. Unfortunately, however, it doesn’t work that way.

A federal law called ERISA prevents the retirement account from paying benefits to anyone except the plan participant. As federal law, it has authority over a state court divorce decree.The administrator of your spouse’s retirement account does not have the authority to transfer a dime to you on the strength of a divorce decree. Instead, they need a special kind of court order designed specifically to facilitate the transfer of retirement funds—a QDRO.

The administrative compliance problem

Even with a court order, every retirement plan has its own internal rules concerning format, wording, and process. A plan administrator will reject an improperly drafted QDRO. The QDRO must be written in a manner that satisfies the plan’s rules. It must be approved by the plan administrator, not just the court. Your lawyer can help you with drafting, but you will need a lawyer with plenty of experience dealing with QDROs, because they are not easy to draft.

Preventing delay or nonpayment

Even with a court order and plan approval, an improperly-drafted QDRO might tie your payment to your ex-spouse’s retirement or even their death. If that happens, you will get nothing until your ex-spouse retires or dies, as the case may be. A well-drafted QDRO can schedule payments independently of your spouse’s retirement or death, thereby ensuring that you receive your money on time.

Protecting your rights if you survive your ex-spouse

If your ex-spouse dies while you are still alive, you could lose your share of the benefits without a well-drafted QDRO. A QDRO can secure survivor benefits or assign a portion of the account that remains even if your ex-spouse predeceases you.

Clarity and precision

A divorce decree might not specify the division of retirement assets with sufficient clarity or precision to effectively execute them. A well-drafted QDRO should spell out exact amounts, percentages, timing, and terms of the transfer.

Early withdrawal penalties

Taking money out of a retirement account before age 59½ usually triggers a 10% early withdrawal penalty. A QDRO waives the penalty for funds that you receive from your spouse’s retirement account.

Tax problems

When someone takes money out of their retirement account, the IRS typically taxes that amount as ordinary income. That’s one of the benefits of certain types of retirement accounts—deferred taxation. But why should your spouse pay taxes on money that they transferred to you? This isn’t fair, and you might expect your spouse to balk at such an arrangement, especially if they also have to pay a 10% early withdrawal penalty.

 

Fortunately, a QDRO can prevent the IRS from taxing your spouse for withdrawals that they transfer to you. A QDRO can also prevent you from having to pay tax on this money. As long as the money goes into your own retirement account (rather than being withdrawn as cash), you won’t need to pay tax on it until you withdraw the money from your own account.

The QDRO process: A step-by-step guide

It is worth repeating that you need an experienced lawyer to draft a QDRO for you. Don’t try to draft one yourself, because small errors in a QDRO can cause big problems. It’s not always obvious what constitutes a mistake when drafting a QDRO.

1. The first step is to get a copy of the divorce decree. The decree must specifically state the split of retirement accounts. Since the value of retirement assets fluctuate, the divorce decree must also state the specific date of the valuation of the retirement accounts.
2. Contact the plan administrator for each retirement account to be split. Get full details of each plan, including and especially the plan’s QDRO drafting rules.
3. Draft the QDRO. This task is much easier said than done. The QDRO must comply with both federal law (ERISA, for instance) and the QDRO rules of each retirement plan that you are splitting. This can be a tricky tightrope to walk. The QDRO should include the following information:

• The names and addresses of you and your ex-spouse.
• The retirement plan’s name.
• The amount or percentage you will receive.
• The time period the order covers.
• For 401(k)s, the current balance and a statement of how gains or losses are counted until you receive the money.
• For pensions, a statement of how to divide future payments.

1. Send a draft QDRO to the plan administrator so they can pre-approve it before the judge signs the QDRO.
2. The judge signs the QDRO to render it enforceable.
3. Send the QDRO to the plan administrator for final approval.
4. The company that administers the retirement plan executes the QDRO. 401(k) funds, for example, might go to a separate account or a new retirement plan for you. For pensions, the company will pay you as the QDRO requires.

We fight for what matters most

Epperson Law Group, PLLC is a Charlotte, NC family law firm with seven decades of combined experience under its belt, including extensive experience with QDROs. We offer aggressive, principled representation to clients throughout the state of North Carolina. Act quickly to schedule a consultation so that we can discuss your needs and objectives.