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Qualified Retirement Plans are defined by Internal Revenue Code Section (“IRC”) 401(a). Pursuant to (“IRC”) 401(a), there are 37 requirements for a plan to be considered a “qualified” plan. Some of the more well-known types of qualified retirement plans that you will come across in your practice are defined contribution plans such as 401(k) and 403(b) accounts, Cash- Balance Plans (which are hybrids between a defined contribution and a pension plan) and conventional pension plans.
If you see the following names in a plan you are probably dealing with a non-qualified plan:
These types of retirement plans are not subject to ERISA, so assignment of benefits is dictated by federal regulations. In fact, effective at the end of 2016, Congress greatly altered what the military pay center (the Defense Finance and Accounting Service, or “DFAS”) will consider “disposable retired pay” for division of military retired pay between spouses.
State plans are controlled by the state legislature, here in Illinois 40/ILCS of the Illinois Pension Code.
*Not all plans are listed, this is just a sampling. Contact me if there’s something not listed that you need pricing on.
WHAT IS A QDRO?
To be recognized as a QDRO, an order must be a “domestic relations order.” A domestic relations order or divorce mediation is: a judgment, decree, or order (including the approval of a property settlement) that is made pursuant to state domestic relations law (including community property law) and relates to the provision of child support, alimony payments, or marital property rights for the benefit of a spouse, former spouse, child, or other dependent of a participant.
A state authority, generally a court, must actually issue a judgment, order, or decree or otherwise formally approve a property settlement agreement before it can be a “domestic relations order” under ERISA. The mere fact that a property settlement is agreed to and signed by the parties will not, in and of itself, cause the agreement to be a domestic relations order. Proficient Divorce lawyer in Illinois representing the cases gather all evidence to ensure that the division is reliable and contingent.
A domestic relations order can be a QDRO only if it creates or recognizes the existence of an alternate payee’s right to receive or assigns to an alternate payee the right to receive, all or a part of a participant’s benefits. For purposes of the QDRO, an alternate payee cannot be anyone other than a spouse, former spouse, child, or other dependent of a participant. Having a divorce attorney near me involved in it makes it easy to reach on the desirable outcome.
WHAT IS A QUALIFIED RETIREMENT PLAN?
Qualified Retirement Plans are defined by Internal Revenue Code Section (“IRC”) 401(a). Pursuant to (“IRC”) 401(a), there are 37 requirements for a plan to be considered a “qualified” plan. Some of the more well-known types of qualified retirement plans are defined contribution plans such as 401(k) and 403(b) accounts, Cash- Balance Plans (which are hybrids between a defined contribution and a pension plan), and conventional pension plans. It is important to point out one of the most important characteristics of a qualified plan, which is that the monies held in trust by the retirement plan may not be alienated from the plan to pay any of the individual's creditor’s or the employer’s creditors. This is because the public policy behind a qualified plan is to secure money for retirement and thus, said money should not be subject to alienation. An important reminder an Individual Retirement Account (“IRA”) is not a qualified plan, and thus is not subject to a Domestic Relation Order in Highland Park. In fact, since an IRA is a custodial account, all that is required for assignment is a letter of direction or in most cases some paperwork provided by the custodian. In drafting the letter of direction, you must have the following language “This transfer of funds shall occur in accordance with section 408(d)(6) of the Internal Revenue Code, with the roll-over of funds being effectuated as a transfer between divorced spouses.”
Normally, money in a qualified plan is protected from alienation. The idea being that one typically cannot assign retirement money to another or take distributions until retirement age. The IRC does allow for a special exception though in the incident of divorce under 414(p). This important distribution exception that the IRC allows for stems from a knowledge that one party may not have had the ability to accumulate retirement during the marriage, this was obviously more prevalent when one parent traditionally stayed at home to raise children.
In fact, all qualified plans must distribute appropriate benefits to an ex-spouse upon divorce from a plan participant, but only if the parties provide a valid QDRO:
TAX CONSEQUENCES OF ASSIGNMENT OF QUALIFIED PLAN MONIES
Disclaimer… I am not a CPA…
The Alternate Payee’s share of benefits is typically considered taxable to the Alternate Payee and not to the Participant (there are caveats to this particularly with deferred compensation). Section 72(t) of the Internal Revenue Code provides an exception to the 10% tax penalty for retirement plan early withdrawals if the withdrawal is made pursuant to a QDRO, the lump-sum distribution will be taxed as ordinary income. If the retirement monies are immediately rolled over into an IRA or annuity vehicle that qualifies under the IRC, there will be no tax consequences to the Alternate Payee. The federal government has their own version of a 401(k) plan (TSP) and the same tax consequences would be applicable to the lump-sum distribution.
For more information concerning QDRO Resources, click here.