With You At Every Step

Anne Prenner Schmidt, Esq., Master of Laws

Let The Law Offices Of Anne Schmidt, LLC, 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 retirement assets. Although this legal area seems daunting 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.

The Law Offices Of Anne Schmidt, LLC, represents clients throughout Illinois in all types of divorce and financial matters, and Anne drafts retirement division orders for clients across the nation.* Anne brings a unique combination of education and experience to the division of retirement benefits, investments and other assets. She has worked with qualified and nonqualified orders, with plans covered by the Employee Retirement Income Security Act (ERISA), and with plans that fall outside federal law. She holds an LL.M. in Employee Benefits and previously worked at the U.S. Department of Labor’s Employee Benefits Security Administration, focusing on Voluntary Fiduciary Correction Program (VFCP) application audits and other fiduciary correction matters.

*Outside of the state of Illinois, the firm’s drafting is considered consulting, not legal representation.

Which Order Do You Need? A Quick Roadmap

The right instrument depends on the type of retirement asset being divided. Most clients fall into one of these categories:

Private employer retirement plan (401(k), 403(b), pension, cash balance plan): You need a QDRO – a Qualified Domestic Relations Order.
Illinois public pension (TRS, SURS, IMRF, Chicago Teachers, police, firefighter, judges, or another Illinois governmental fund): You need a QILDRO – a Qualified Illinois Domestic Relations Order. If the participant is at or near retirement, you will eventually also need a QCO (Qualified Calculation Order).
IRA or brokerage account: Usually no court order is needed – the custodian can process the division on a standard Transfer Due to Divorce form. In some cases, a Letter of Direction is required.
Nonqualified deferred compensation, SERPs, RSUs, executive compensation: These are not divided by QDRO. They require separate, plan-specific drafting.

If you are not sure which bucket you are in, that is exactly what an initial consultation is for. Bring your most recent statement and we can tell you in a few minutes.

The Basics: What A QDRO Does

A domestic relations order (DRO) is a court order that transfers a portion of one spouse’s retirement benefits to the other spouse – or in some cases, to a child or other dependent. A DRO becomes a qualified domestic relations order (a QDRO) once it has been reviewed and accepted by the plan administrator.

Under ERISA and the Internal Revenue Code, the only people who can receive benefits as an “alternate payee” under a QDRO are a spouse, former spouse, child, or other dependent of the plan participant. The order must give the plan clear, unambiguous instructions on how much the alternate payee receives, when it will be paid, and how it will be paid. Vague or inconsistent drafting is the single most common reason a plan rejects an order.

Anne’s experience drafting and reviewing these orders – combined with her LL.M. in Employee Benefits and her DOL background – means clients get an order that the plan will actually accept the first time.

Qualified vs. Non-Qualified Plans

Qualified retirement plans are defined by Internal Revenue Code Section 401(a). To be “qualified,” a plan must meet 37 separate requirements under that section. Common examples include 401(k) plans, 403(b) plans, traditional defined-benefit pension plans, and cash balance plans (which are hybrids between a defined contribution and a defined benefit plan).

One of the defining features of a qualified plan is that the money held in trust cannot be alienated to pay the participant’s creditors or the employer’s creditors. The whole point is to protect retirement savings. The Internal Revenue Code creates a narrow but critical exception in IRC 414(p): retirement assets can be assigned in divorce – but only through a properly drafted, properly qualified domestic relations order. This exception exists because, historically, one spouse (often the spouse who stayed home with children) had no meaningful opportunity to accumulate retirement savings of their own. The QDRO is the mechanism that ensures that neither spouse is left without retirement security.

Non-qualified arrangements – IRAs, deferred compensation, SERPs, top-hat plans, and most executive compensation – are not governed by the QDRO rules. They are divided through different mechanisms, which the sections below address.

QDROs For Private (ERISA) Plans

For private employer plans, the QDRO process is governed by ERISA and policed by the plan administrator. A few procedural points matter:

The plan, not the court, decides whether an order is qualified. A judge can enter a domestic relations order, but it is not a qualified order until the plan administrator says so.
Every plan must have a written QDRO determination procedure. This document tells the parties what the plan requires, how long the determination will take, and how to dispute a denial. A good drafter reads this procedure before drafting.
The 18-month segregation rule. Once the plan is on notice that a QDRO is forthcoming, ERISA requires the administrator to act in good faith and segregate the benefits that may become payable to the alternate payee for up to 18 months. Missing this window can cost the alternate payee real money.
Separate Interest vs. Shared Interest. For defined benefit plans, the structural choice between a Separate Interest order (the alternate payee gets her own lifetime benefit) and a Shared Interest order (she receives a portion of the participant’s payments when he begins receiving them) has enormous downstream consequences. Choosing the wrong structure is one of the most common — and most expensive – drafting errors in QDRO practice.

The U.S. Department of Labor publishes a useful overview of QDRO requirements: DOL QDRO Guidance.

QILDROs: Illinois Public Pensions

Illinois public pensions are not governed by ERISA – they are governed by the Illinois Pension Code. Because of that, the typical QDRO does not work for them. Instead, Illinois has its own statutory instrument: the Qualified Illinois Domestic Relations Order, or QILDRO.

QILDROs apply to the Illinois public retirement systems, including (but not limited to):

Illinois Teachers’ Retirement System (TRS)
State Universities Retirement System (SURS)
Illinois Municipal Retirement Fund (IMRF)
State Employees’ Retirement System (SERS)
Chicago Teachers’ Pension Fund
Municipal police and firefighters’ pension funds
Cook County and Chicago employee funds
Judges’ and General Assembly retirement systems

QILDROs work differently than QDROs in two important ways. First, they must be drafted on a statutory form prescribed by the Illinois Pension Code – there is very little room to deviate. Second, for Illinois public pensions, dividing the benefit is generally a two-step process: a QILDRO is entered at the time of divorce, and a Qualified Calculation Order (QCO) is entered later, when the participant actually retires. The next section explains the QCO.

QCOs: The Second Step For Illinois Pensions

A QILDRO entered at the time of divorce does one thing: it tells the Illinois pension fund that you are entitled to a share of the participant’s benefits when those benefits eventually begin. It does not tell the fund the exact dollar amount to send you each month. That final calculation happens later – when the participant actually retires – through a second order called a Qualified Calculation Order, or QCO.

Do I Need A QCO?

If your divorce is final, your QILDRO is on file, and your ex-spouse is approaching retirement (or has just retired), then yes. The fund cannot begin paying you your assigned share until a QCO is drafted, entered by an Illinois court, and submitted to the fund. This is true even if your QILDRO was entered years ago and everything else about your settlement is long since resolved.

What The QCO Does

The QCO takes three pieces of information – your Marital Settlement Agreement, your previously entered QILDRO, and the participant’s Final Benefits Statement from the pension fund – and applies them to determine the exact monthly amount the fund will pay you. Once the QCO is entered and submitted, the fund begins direct payments to you as the alternate payee.

What If My Ex Retired Before We Got Divorced?

If the participant has already retired at the time of divorce, we can often skip the two-step process. We can file the QILDRO with the calculation already determined on the QILDRO forms, saving you the cost of drafting and filing two separate documents and avoiding additional delay.

How Long It Takes

Like QILDROs, QCOs typically take a few weeks to a few months from start to finish, depending on how quickly we receive the participant’s Final Benefits Statement from the fund, court entry timing, and the fund’s review period. We move as fast as we can and keep you informed at every stage.

Ready To Start?

Call 847-926-7679 or schedule a consultation online. If you already have a QILDRO on file, bring a copy along with your divorce decree and any recent correspondence from the pension fund – that lets us move quickly.

Dividing An IRA In Divorce: When You Don’t Need A QDRO – And When You Do

IRAs and brokerage accounts are not qualified plans, and unlike 401(k)s or pensions, they do not require a QDRO to be divided at divorce. Most of the time, dividing an IRA is handled directly between the account holder and the IRA custodian using a Transfer Due to Divorce form.

The Simple Path (Most Cases)

If your marital settlement agreement clearly identifies the IRA account and specifies how it is to be divided – with language indicating the transfer is being made “incident to divorce” pursuant to Internal Revenue Code Section 408(d)(6) – your financial advisor or the IRA custodian can usually process the division using their standard form. Call the advisor listed on your statement or log in to your online account and look for a Transfer Due to Divorce form. Complete it, attach the documents the custodian requires, and the division can proceed.

The required statutory language for the transfer is:

“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.”

When A Letter Of Direction Is Needed

Some IRA custodians will not process a division on the standard form alone – they require a court-certified Letter of Direction signed by a judge. In those cases, we can be retained to draft that Letter. We review what the specific custodian requires, draft the document, coordinate court entry and certification, and deliver the certified Letter of Direction to you or your attorney.

If your advisor or IRA administrator has told you the transfer cannot be processed with the standard form, contact us with the specific requirements the custodian provided. We will tell you whether a Letter of Direction is the right instrument and what it will take to get it done.

Tax Consequences Of Assigning 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% early-withdrawal tax penalty for retirement plan distributions made pursuant to a QDRO; the lump sum distribution will still be taxed as ordinary income. If the retirement monies are immediately rolled over into an IRA or other qualifying vehicle under the IRC, there will be no immediate tax consequences to the alternate payee. The federal government has its own version of a 401(k) plan (the Thrift Savings Plan, or TSP), and the same tax consequences apply to a lump sum distribution from a TSP.

As always, run the numbers with a CPA or financial advisor before you take a distribution. The tax bill can be much larger than people expect.

The Law Offices Of Anne Schmidt, LLC, Is Here To Help

Talk with an attorney about setting up a QDRO, QILDRO, QCO, or Letter of Direction. We don’t walk away until the money moves.

Call the firm at 847-926-7679 or email us today to schedule a consultation.