QDROs and the Division of Retirement Benefits

The longer a marriage goes on, the more assets each party accumulates. While you are working, there is a strong chance you will acquire retirement benefits either by the contributions of your employer or your own. Retirement benefits in California may be treated as income, so if you get a divorce late in life, the benefits you worked hard to receive upon retirement may be subject to a property division in a divorce proceeding. Before discussing a unique type of legal procedure that can protect your earned benefits, below is an overview of some of the retirement benefits available in California.

Types of Retirement Benefits in California

Fixed Contribution Plans: Fixed contribution or defined contribution plans work in essentially the same way. You tell your employer how much you want to contribute and they put money in an account on your behalf. Once this is done, there are many employers that agree to match a certain part of your contribution. These plans include 401(k)s and 403(b)s, which are fixed contribution plans for individuals who are teachers.

Profit Sharing Plans: This type of plan is where a company will give a percentage of company profits to the individual worker as part of their retirement.

Stock Bonus Plan: Similar to profit sharing plans, this type of plan is where an employer gives an employee a portion of profits, but instead of cash value, it is paid in company stock.

Pension Plans: This type of plan allows an employer to make contributions to a pool of funds that is invested for the employee’s future benefit. When the employee retires, they receive the benefits.

This list is not exclusive, as many plans are specific to particular employers. Additionally, California has some state-specific retirement plans, including CalPERS, a public employee retirement system, and CALSTRS, which is a teachers’ retirement system. There are also specific retirement plans for federal employees and members of the military. There are separate laws for the division of military pay under the Uniformed Services Former Spouses Protection Act. That Act is available here.

How Are Retirement Benefits Divided?

The California Family Code has specific guidelines for how to divide retirement benefits between two divorcing spouses. California is a community property state, and the law requires each spouse to receive the full community property share to certain retirement benefits. This means that spouses will be splitting community property 50/50. California law has tried to create safeguards that prevent divorce orders that would result in an increase in benefits under a retirement plan or call for the payment of benefits to any person before the person who is earning benefits retires.

To ensure the retirement benefits you worked hard to gain are protected in a divorce proceeding, it is a good idea to consult an attorney who can help you set up a Qualified Domestic Relations Order.

What Are Qualified Domestic Relations Orders?

Qualified Domestic Relations Orders, or “QDROS” (pronounced like quadro), are specific types of court orders that help divide retirement benefits in a divorce. A QDRO is issued at the end of a divorce proceeding in conjunction with a final divorce decree. It gives instructions to the administrator of your retirement plan on how your retirement benefits should be divided. A QDRO assists in the division of retirement benefits upon separation or divorce. The Department of Labor offers sample language of what should be in a QDRO, but it is important to realize that every retirement or pension plan is different.

What Must Be Included in a QDRO?

The Internal Revenue Service requires certain requirements to appear in a QDRO for it to be valid. The minimum requirements are listed below:

• A name and last known mailing address of the person who earned the benefits and, if applicable, any alternate person who may receive benefits.
• The amount or the percentage of benefits of the benefit earner that are going to be paid to the alternate person. If the percentage is not determined at the time of the divorce order, the QDRO must include the method of how the amount or percentage of benefits will be calculated.
• The total number of payments that the order applies to, and
• If there is more than one retirement plan, the designation of each plan to which the order applies.

Additionally, a QDRO does not qualify as a court order until it is approved by the person or organization that facilitates the benefit plan.

How Does a QDRO Distribute Benefits?

Distribution of benefits under a QDRO is usually based on a formula created by the Department of Labor. The plan administrator, who is discussed in more detail below, will use a variety of variables in determining the amount of benefits that should be paid to the non-earning spouse. If a retirement plan has a lump sum option, the person who was not the earner of benefits can get their share in one payment or have it combined with their own IRA.

What Is the Role of a Plan Administrator?

Once a QDRO is presented in court, it is then referred to the administrator of the benefit plan. Once the plan administrator receives the QDRO, it is the administrator’s responsibility to notify both the person who earned the benefits and the alternate person who may receive them under the divorce order that they received the order and their procedures and policies for qualifying an order. It can take a long time, even as long as 18 months, for the approval of a QDRO by a planned administrator. The long delay largely results from how complex many benefit plans are.

Which Retirement Plans Are Covered by a QDRO?

QDROs are not needed for any government retirement plans. These include pensions from the military or state or federal retirement benefits, as these are covered by a federal law called the Employee Retirement Income Security Act or ERISA. Pension plans are usually restricted to make payments to one person, so they cannot be assigned to someone else, even in a divorce proceeding. Pensions paid to a person other than the person who had earned the benefits could result in tax consequences.

IRAs Are Excluded from QDROs

QDROs are also not needed when dividing an Individual Retirement Account or IRA. The IRS code and ERISA law say that benefits received under ERISA may not be paid to anyone other than the participant in the program during the participant’s lifetime. IRAs are not subject to this requirement, so they do not need to be included in QDROS.

A QDRO is needed to divide 401(k) plans, profit sharing plans, employee stock ownership plans, tax sheltered annuities, and business pension plans. The laws surrounding QDRO’s are complicated and, if approached without the advice of an experienced lawyer or a Certified Professional Account, can result in the loss of benefits.

Tax Implications of a QDRO

Pension plans falling under QDROs are taxed to the recipient spouse, not the person who is a participant in a pension plan. Even if there is language in the QDRO that requires the spouse who is the plan participant to pay taxes, the receiving spouse still has to pay the taxes.