Let Us Help You Assign Your Retirement Monies And More
When it comes to divorce or separation, one of the most complicated aspects for many people is the division of assets, specifically the division of retirement assets through Domestic Relations Orders (DROs). Although this legal area seems complicated if you have never been through it before, an experienced lawyer can simplify the process, make sure you understand your rights and options, and protect your financial interests.
At the Law Offices of Anne Schmidt, LLC, we represent clients throughout Illinois in all types of divorce and financial matters. And we draft QDROs for clients across the nation*. Attorney Anne Prenner Schmidt brings a unique combination of education and experience that benefits our clients in the division of retirement benefits, investments and other assets. Anne has experience with qualified and nonqualified orders, with plans covered by ERISA and plans that are not covered under federal law. She has earned an L.L.M. in Employee Benefits and has worked for the U.S. Department of Labor Benefits Security Administration, focusing on Voluntary Fiduciary Correction Program (VFCP) application audits and other fiduciary correction matters.
DRO is the basic term for domestic relations order. A DRO is an order that transfers a specific percentage of a divorcing party’s retirement benefits to the other divorcing party. A DRO becomes a Qualified Domestic Relations Orders (QDRO) once it is accepted by the plan. In Illinois, a QDRO is called a QILDRO (Qualified Illinois Domestic Relations Order).
There are numerous factors that influence the process by which monies can be assigned, and the amount and manner by which the benefits are transferred. The type of retirement plan and various laws and regulations all have an influence on the process.
The entire process of establishing a QDRO can be complicated, and our clients often have many questions about QDROs. Attorney Anne Prenner Schmidt brings the experience, knowledge and compassion to help our clients through the process of assigning monies and establishing QDROs during divorce or separation.
*outside of the state of Illinois, our drafting is considered consulting, not legal representation.
The Basics Of QDROs
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 another dependent of a participant. Anne Schmidt’s expertise in drafting QDROs and the professionalism of her office make a complex and confusing process more understandable and navigable.
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. One of the most important characteristics of a qualified plan 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 creditors 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 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 rollover 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. Drafting a QDRO is handled by a specialized divorce lawyer who understands all the intricacies of each plan. The Law Offices of Anne Schmidt is the premier resource for reviewing and drafting all DROs.
- The QDRO must provide clear instructions to the plan administrator on how and when to pay the alternate payee.
- Plans are required to have a QDRO determination procedure, which clearly informs all parties what is required in the DRO to determine if it is qualified, the time frame in 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 that 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
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 its own version of a 401(k) plan (TSP) and the same tax consequences would be applicable to the lump-sum distribution.