Welcome to FreeDivorce.com.
Christina: This is Christina.
Ed: This is Ed. Today, are going to talk about what happens after you have filed your QDRO with the court and it has been approved by the retirement plan administrator. We are also going to discuss a variety of other issues related to the division of retirement assets.
Christina: After the plan administrator reviews and approves my QDRO, then what happens?
Ed: It depends on which type of retirement asset you have. Do you have a defined contribution account or a pension?
Christina: Let’s start with a defined contribution account.
Ed: If you have a defined contribution asset such as a 401(k) account, the administrator will send documents to the non-employee spouse asking that spouse how they want their share of the account handled. The spouse will be given at least a couple of options. One option may be to have their share remain in a separate account with the administrator. Another option may be to have their share paid out to another retirement account custodian, such as the custodian of an IRA. Your spouse can open an IRA account with a bank and have their share of your 401(k) rolled into the IRA account. This is what most people do. A third option is to take a cash distribution. Most people don’t take a cash distribution because, if they do, they will have to pay state and federal income tax on the distribution.
Christina: What happens if my QDRO is for a pension?
Ed: If the QDRO pertains to a pension, then there are no account funds to payout. Instead, your ex-spouse will wait until the pension becomes payable. When the pension becomes payable, they will receive their share of the pension each month directly from the pension plan administrator. It is very important after the QDRO is in place that your ex-spouse keep the pension plan administrator informed as to their address. QDROs always set forth the address of both parties. However, if the pension isn’t paid out for another ten or twenty years, it is likely that one or both parties will move multiple times in that ten or twenty-year period. When it comes time to pay out the pension, if the administrator does not have a current address for you or your spouse, the administrator is not going to know where to send the pension payments.
Christina: When do the pension payments become payable?
Ed: The person that earned the pension is the “participant”. The other spouse is the “alternate payee”. Let’s say the pension plan provides that the “earliest retirement age” is 55. The participant reaches age 55, does not want to retire, but instead intends to work until age 65. The alternate payee wants to start receiving their share of the pension when the participant turns 55. Many pension plans include a “Gilmore” provision that will permit the alternate payee to start receiving their share of the pension as soon as the participant reaches the earliest retirement age, even if the participant elects to keep working. The QDRO should spell out whether or not the alternate payee will have this option.
Christina: What if my spouse and I have a lot of different retirement assets, do we need a QDRO for each retirement asset?
Ed: You don’t need to draft a QDRO for each and every qualified retirement asset you and your spouse own. QDROs can get to be very expensive, particularly if you have a lot of retirement assets. Some people may have switched employers multiple times over their career and have three or more 401(k) accounts. Their spouse may also have multiple retirement accounts. If you and your spouse own a total of six 401(k) accounts and you are going to spend $500 on an actuary to draft each QDRO, you are talking about a significant amount of money, not to mention the hassle of dealing with the QDRO approval process for six different accounts.
Christina: How can I reduce the number of QDROs?
Ed: You may want to offset the accounts. For example, if you have four 401(k) accounts containing a total of $500,000 of community money and your spouse has two 401(k) accounts with a total of $300,000 in community money, you may be able to equally divide all of the accounts with just one QDRO. Have your settlement agreement say that your spouse will keep all of his or her retirement accounts, that you will keep all of your retirement accounts, except one QDRO will be used to equalize the division of all of the accounts. The difference in value between your retirement accounts and your spouse’s retirement accounts is $200,000. If you have $100,000 paid out of one of your retirement accounts to your spouse pursuant to one QDRO, both parties will then end up with $400,000 of retirement assets. Instead of drafting six QDROs, you used just one QDRO to equally divide all six accounts.
Christina: In your practice, have you found the omission of retirement assets in property settlement agreements to be a big problem?
Ed: Yes. You have to be very careful when it comes to identifying retirement assets. Many people don’t understand what retirement assets they have. It is very common for people to think they only have a 401(k) account and not realize they also have a pension. Some employers offer multiple types of retirement benefits. You don’t want to overlook any retirement asset. If you are getting divorced, both you and your spouse should check with your employers to confirm you know about all retirement assets you have.
Christina: What about IRA accounts, do I need a QDRO to divide an IRA account?
Ed: No. QDROs apply to “qualified” retirement plans. An IRA account is not a “qualified” retirement plan. You do not need a QDRO to split an IRA account.
Christina: How do I split an IRA account?
Ed: All you need is a court order. For example, assume you have an IRA account in your name that contains $50,000 and it is all community property money that will be split with your spouse. You can’t just take $25,000 out and pay it to your spouse. If you were to do that, you would have to pay state and federal income taxes on the withdrawal, plus an early withdrawal penalty if you are not age 59 and a half. What you need to do is to get a court order that awards your spouse the $25,000 from your IRA. The court order you need will be your divorce judgment. The divorce judgment needs to include a provision that spells out what amount or what percentage of your IRA your spouse is to receive.
Christina: Let’s say that my divorce judgment says my spouse gets 50% of the money in my IRA account. What do we do after we get the signed judgment back from the court?
Ed: After you have the court order (i.e., divorce judgment), have your spouse go to the bank, brokerage firm, or other institution where you have your IRA. Have your spouse open an IRA account with that entity. Then, give the entity a letter instructing the entity to make the transfer from your IRA account directly into your spouse’s newly created IRA account. Some entities will want more than a letter. Some will want a copy of the court order. Some will want you to fill out various additional forms before they will make the transfer. After the transfer is made, your spouse can move the money wherever he or she wants to keep their IRA.
Christina: Can I make the IRA transfer before I get the court order or the divorce judgment that spells out the amount my spouse gets from my IRA?
Ed: No. It is critical that you not make the transfer until after you have the court order awarding your spouse part of your IRA. If you make the transfer before the court order is issued, the transfer will be taxable and subject to an early withdrawal penalty. Wait until you have a filed-endorsed copy of the court order (judgment) in your hand before you make the IRA transfer.
Christina: What if my retirement benefits are not vested, do I still need to deal with unvested retirement assets?
Ed: Yes. Retirement assets can be vested or unvested. For example, your employer may require that you work for 5 years before becoming vested in a pension plan. If you work for only 4 years and then quit or get laid off, you will not receive any pension benefits. Some people think that an unvested retirement asset can be ignored in their settlement agreement because the right to receive the retirement benefit has not yet been perfected. This is incorrect. All retirement benefits, vested or unvested, should be identified in your divorce judgment and disposition of the retirement assets should be addressed in the judgment. If you or your spouse have unvested retirement assets through your current employer, your settlement agreement should address the unvested retirement asset. You can have a QDRO prepared to deal with an unvested pension. If the pension never vests, neither party will receive any benefits. However, if the pension does vest in the future, each party will receive its fair share.
Christina: If my divorce judgment explains how our retirement assets are to be divided, do we still need QDROs?
Ed: Yes. When you are dividing retirement assets, your divorce judgment needs to set forth the basic agreement about how those assets are to be divided. A QDRO is a document that is separate from the divorce judgment. Your divorce judgment may state in general terms that the community property interest in your 401(k) account or your pension will be equally divided by means of a QDRO. You will need to follow up the divorce judgment by drafting a QDRO that will contain more detailed language explaining exactly how the community property interest will be equally divided. It’s not enough that your divorce judgment states that the community property interest in certain retirement assets will be equally divided. You also need to have the QDROs.
Christina: When do we need to get the QDROs drafted?
Ed: As soon as you can. Many people procrastinate when it comes to getting QDROs drafted. They get the divorce judgment and don’t follow up with getting the QDROs drafted. Don’t let this happen. One party could lose important retirement rights if a QDRO isn’t drafted in a timely manner. For example, a pension can be payable to the person that earned the pension. If the person that earned the pension dies, a survivor benefit can be paid to the deceased person’s spouse. Once your marital status has been terminated by a divorce judgment, you are no longer the other person’s spouse. A QDRO permits a plan administrator to make pension payments to an ex-spouse, even if the plan participant has died. If the person that earned the pension dies after the divorce judgment terminates the parties’ marital status, but before a QDRO is in place, the surviving party will likely forfeit any right to the pension payments. You want to get the QDROs finalized and accepted by the plan administrators before your marital status is terminated. If this is not possible, get the QDROs done as soon as you can.