Often times employee benefit plans represent the most valuable assets accumulated during a marriage. Dividing these assets in the event of divorce can be a complex process, one that requires extensive training and specific knowledge.
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: Supplemental, SERP, Non-qualified, Excess Benefit Plans.
State plans are controlled by the state legislature, here in Illinois 40/ILCS of the Illinois Pension Code.
Thrift Savings Plans, FERS
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.
QMSCOS= Qualified Medical Support Orders are required if you are not the participant in the health care plan in order to have access to your children's health care records.
Thank you for choosing the Law Ofﬁces of Anne Schmidt, LLC to assist you with the drafting of your Domestic Relation Order(s). Most likely at this point your Divorce is either finalized or nearing completion, and you are exhausted emotionally and ﬁnancially. Our goal is to make this part of the process as painless and transparent as possible for you, and to be here every step of the way for any questions that you might have. The following are probably just a few of the questions you would like answered:
What is a QDRO? A QDRO is a Court Order required by both the IRS and the Department of Labor in order to assign retirement money (i.e.: Pensions, 401(k) Plans, Cash Balance Plans, ESOPs) to a former spouse. Normally you can’t touch your employer sponsored retirement without jumping through lots of hoops and hurdles, and even then, there are massive penalties attached to doing so. However, divorce is an exception to this rule, allowing you to assign this money without the tax ramiﬁcations through the entry of a QDRO. All of this is controlled by a Statute called The Employee Retirement Income Security Act of 1974 (“ERISA”) that I just happen to have a Master’s degree in.
What is a QILDRO? A QILDRO is a Court Order similar to the aforementioned QDRO, but for a Plan administered by the State of Illinois. Unlike Federal law, which controls private employer plans, state plans such as Teacher’s Pensions, Firefighters, Police… are controlled by Illinois Pension Law.
Do I need a QDRO to divide an IRA? No. Typically, dividing an IRA only requires a letter of direction. These forms are usually easily found on the Administrator’s website and I am happy to walk you through how to ﬁll out the forms (or advise your ﬁnancial advisor accordingly.)
How much does it cost? My ﬁrm charges $650.00 to $1000.00 to draft each Order. Although this fee does not include us entering the Order into court for you, it does cover everything necessary to prepare the QDRO for entry into court, such as reviewing the plan documents and statements, communicating with the retirement plan administrator to make sure everything is approved and done properly, and drafting the Order. In addition, if for some reason we need to redo something, these costs are included in our flat fee. Typically, your divorce attorney will enter the Order for you in court and obtain the certiﬁed copy, which is required to be sent to the plan administrator. If you need me to enter it, or you want me to ﬁnd someone to enter it for you, then we can talk about that as well.
How fast does all of this happen? We are pretty fast, but sometimes the plans- not so much… We have to wait for them to approve things and that can take some time. Once the plan administrator receives the Order that has been entered by the Court, they legally only have 60 days to tell you whether it is “qualiﬁed” or not- meaning it has passed muster and the money will be segregated from your spouse’s plan and assigned to you. At that point, the plan administrator will send you a letter saying everything is approved along with distribution forms asking you what you want to do with your money.
What if my QDRO is rejected or not preapproved? Often times due to constant market fluctuations or minor changes that the plan requires to the Order we can receive a letter asking us to make changes before the plan will accept the Order and assign the requisite monies. This is quite normal in the process and nothing to be alarmed about, any changes that we need to make to the Order to get it approved by the plan are included in your flat fee. We have a very strong knowledge of which plans require preapproval or may require tweaking of our Orders and will advise you accordingly during the process. The most important thing is to not be alarmed if you receive a letter from the plan saying changes are required, we are on it and will help implement those changes to make sure your Order is approved and the money is assigned properly.
What’s a Participant and what is an Alternate Payee? The Participant is the member of the plan and the Alternate Payee is the person receiving the money from the member’s plan in the Marital Settlement Agreement- for example, John Smith is a participant in the ABC 401(k) Plan and Sally Smith his Ex- Wife is the Alternate Payee. The plan will require up to date personal information for both the Participant and Alternate Payee to approve the assignment, we will send you an addendum form asking you for all of this info. If you are uncomfortable giving it via email, just call us and we will happily take it over the phone.
What do I do with my money? Well, I am not a ﬁnancial advisor, so I cannot advise you the best way to invest or spend your money ( I can refer you to great ones if you need one)- but, what I can tell you is if you take a distribution (on a plan that allows a distribution like a 401(k)) you will pay taxes on the distribution, and if you roll over into an IRA you will defer your taxes. Regardless, as I mentioned earlier you avoid the 10% excise tax penalty through this nifty QDRO.
How much do you charge outside of the ﬂat fee? If you need work done above and beyond the ﬂat fee, my rates are $300.00 an hour. Because I have a Masters in Beneﬁts, I often help people ﬁgure out their health care issues in divorce i.e.: COBRA vs. Illinois Spousal Continuation Coverage and Qualiﬁed Medical Support Orders (you need those to have access to your kid’s medical plans if they are covered under your former spouse.) I also do mediation and collaborative law, basically, any family law that is not litigated. My website is anneschmidtlaw.com.
How do I get in touch with you? Email or call me anytime. My office number is 847.926.7679 and my cell is 312.208.7389. My email is firstname.lastname@example.org.
I look forward to working with you!
Anne Prenner Schmidt
To be recognized as a QDRO, an order must be a “domestic relations order.” A domestic relations order 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.
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.
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 individuals 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 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:
• The benefits of a QDRO can only be alienated if the domestic relations order is determined, by the plan administrator to be a QDRO.
• The QDRO must provide clear instructions to the plan administrator on how and when to pay the alternate payee (“former spouse.”)
• Plans are required to have a QDRO determination procedure which clearly informs all parties what they will look for in the DRO to determine if it is a QDRO, the time frame it which the administrator will make such a determination, and how either party can dispute the plan administrator’s determination.
• If the plan administrator is on notice that a QDRO is forthcoming, then there is a statutory 18-month period where the plan administrator must act in good faith and segregate any benefits which might become distributable to an alternate payee should a valid QDRO be communicated.
For further guidelines as to what requirements determine a valid QDRO see: https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/publications/qdros.pdf
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 on the lump sum distribution.