During divorce proceedings, assets accumulated by the spouses during marriage are divided between them. How assets are divided depends on their qualification as community or separate property. However, multiple laws and regulations apply regarding the division of employment-related benefits. These laws include local, family, and community property laws and state and federal laws on employee benefit plans. If you are in the divorce process involving employment benefits, contact an experienced divorce attorney. Our attorneys at the Los Angeles Divorce Lawyer can help you navigate the complex laws that surround the division of employee benefits.
Understanding Qualified Domestic Relations Orders (QDROs)
A Qualified Domestic Relations Order, abbreviated as QDRO, is a state court order that applies when dividing and assigning one spouse's interest in qualified retirement plans to the other spouse. The order must comply with the requirements outlined under the federal Employee Retirement Income Security Act of 1974 (ERISA). Qualified retirement plans include 401(k), pensions, ESOPs, and 403(b). QDROs are applicable when satisfying obligations like child support, alimony, and marital property.
Under federal law, a QDRO is mandatory when distributing retirement benefits to one spouse. For a QDRO to be qualified, it must recognize and create the right of the other spouse to receive benefits even if he/she is not a benefit participant. For a court order to qualify as a QDRO, it must meet all the ERISA requirements. This means the order must instruct the benefits plan that the non-participating spouse is entitled to a percentage of the retirement benefits under the family law rules.
A QDRO should not instruct the benefits plan to:
- To offer any type or form of benefit that is not covered under the plan
- Grant increased or higher benefits than applicable
- Pay the benefits to another payee that are required under another QDRO
A QDRO cannot alter the conditions of the benefits provided under a plan, and it cannot alter a plan's structure. A QDRO cannot assign an ex-spouse's right to another person with a different pre-existing QDRO.
ERISA Plans That Can Be Divided According to a QDRO
QDRO applies to all the qualified benefits plans regulated by the federal ERISA laws. For companies or employees operating within California's jurisdiction, ERISA allows the application of community property laws. Below are some of the ERISA plans covered under QDROs:
ERISA Defined Pension Plans
Defined benefit plans, and pensions can be distributed according to QDROs. These are private, tax-deferred retirement plans created by companies, unions, or individuals. They provide a steady income to an employee after retirement. During divorce, if one of the spouses has a defined contribution plan, a QDRO can be drafted to address the division of the pension benefits.
Usually, the former spouse will only receive the retirement benefits as an alternate payee when the employee spouse attains the earliest retirement age or retires (or any other time in between). The benefits will be distributed as monthly payments for life for both the employee and the former spouse.
ERISA-defined Defined Contribution Plans
A defined contribution plan is a savings account that a company, individual, or union can create. It is meant to offer supplemental income after an employee retires. The most common types of defined contribution plans include:
- 403 (b)s
- 401 (k)s
- ESOPs
- Profit Sharing Plans
These benefits are distributed in a lump sum following a divorce. These distributions can be effected immediately, after the employee's spouse retires, or at any other time allowed in the plan.
Federal Government Retirement Plans
Federal government employees are members of either of these plans
- Federal Employees Retirement System
- Civil Service Retirement System
These employees include United States postal workers, civilian personnel on a military basis, Federal Aviation Administration members, and many others. The benefits will be granted to the alternate employee under QDRO when the federal employee retires and will continue for the employee's life. Sometimes, the alternate employee can qualify for a Spouse Survivor Annuity. This monthly annuity commences after the death of the federal employee and continues for the life of the alternate payee.
U.S. Military Plans
Uniformed United States Armed Forces personnel can also receive benefits under the Military Retirement System. These employees include the Army, Marine Corps, Navy, Coast Guard, Air Force, National Guard, reserves, NOAA, and public health service. The alternate payee receives the monthly benefits upon the military spouse's retirement and can qualify for the Survivor Benefit Plan Annuity. The annuity is available after the death of the former military spouse and continues for the life of the alternate payee.
Qualifying As An Alternate Payee
Under the Internal Revenue Code and ERISA, an alternate payee is any person to whom benefits can be paid under a QDRO. An alternate payee can be a:
- Spouse
- A former spouse
- Child
- Any other qualifying dependent
The first three beneficiaries are straightforward and unambiguous. However, the meaning of any other qualifying dependent is unclear. Two people can be in a long-term, domestic, or marital relationship without being married or bearing children. The 9th Circuit of Appeals in 2009 established that a woman in a quasi-marital relationship met the requirements of an alternate payee since the relationship was long-term.
It is crucial to note that some qualified dependents might not access all the benefits to which alternate payees are entitled. For example, the surviving spouse annuity is only available to the spouse or former spouse of the contributing employee. In 2013, the United States Supreme Court ruled that a same-sex spouse qualified as a spouse and alternate payee for federal law purposes.
The Basic Procedure For Distributing Benefits
When dividing benefits via a QDRO, the first step is to consult an experienced lawyer. A lawyer helps the involved parties to identify all the plans and the administrators for the benefits to be divided.
An attorney prepares a draft QDRO. The QDRO must be approved and agreed upon by all the parties. This stipulated order outlines how the benefits will be divided.
The third step involves submitting the draft QDRO to the plan administrator. The attorney will submit the draft QDRO on your behalf. The administrator reviews the draft to ensure the QDRO complies with the ERISA laws and plan terms before deeming it "qualified." If the administrator considers the draft "unqualified," the attorney works on the draft to modify and revise it until it satisfies all the requirements.
Once the plan administrator deems the draft “pre-qualified," the parties sign the QDRO and the attorney files the order with the court.
After the filing, the QDRO is served to the plan administrator, who processes the benefits division.
The Formula Used When Dividing The Benefits
The most common question regarding QDROs is the formula for dividing the benefits. The benefits can be shared using:
- Time rule
- Adding the contributions accumulated from employment during marriage and the investment gains or losses
The second method mainly applies to profit-sharing plans like 401(k)s. The time rule mainly applies when dividing defined benefit plans (pensions). Pension plans are time-based because an employee’s benefits accumulate every year they work for the employer. The entire retirement is considered community property if the full pension benefits were accumulated during the marriage.
If only a portion of the pension was accumulated during marriage, the time rule will be applied when dividing the pension benefits. Any benefits earned before or after the marriage are considered separate property, which is not available for the former non-employee spouse.
The Benefits Of QDROs
QDROs are essential, especially when dividing ERISA-regulated benefit plans. QDRO allows the non-employee spouse to access retirement benefits that would otherwise be inaccessible. A QDRO orders a plan to send benefit payments directly to the alternate payee. By doing this, QDROs preserve retirement benefits' "qualified" status for tax purposes.
The leading advantages of a QDRO are:
- Allow the non-employee former spouse to access funds that would otherwise be unavailable.
- Preserves the IRS tax lien benefits
- Lowers the risk of benefits loss, especially if a plan participant is in bad health
- Allow exemptions from additional taxes on early distributions
- Enhances increased flexibility in estate planning and retirement
- Benefits cannot be lost due to pre-retirement death
Whether Benefits Can Be Assigned After They Are Distributed
It is not recommended to assign the benefits after they are distributed. ERISA plans cannot control what happens to the benefits after liquidation of the plan. In addition, after removing the benefits from the plan, they can no longer qualify for the special tax status. What if the employee-spouse has already received some of the retirement benefits before the divorce? In this case, the paid-out benefits will be considered community property. Therefore, the distributions will be subject to the property division laws.
Prohibited QDRO Provisions
The laws governing QDROs prohibit specific actions and provisions. First, a QDRO cannot grant the alternate payee benefits not covered under the benefits plan. Therefore, if the employee's spouse is not eligible or does not qualify for a particular benefit, the alternate payee is also not eligible. This is the primary prohibition under the laws governing QDROs. In the case of pensions, if the employee's spouse does not qualify for the monthly pension distributions, the alternate payee is also ineligible.
Under the defined contribution plans (401(k)s), an alternate payee is not allowed to receive a rollover or sum cash distribution into an alternative account during distribution. However, plan administrators can allow this only after changing the plan documents to accommodate it.
A QDRO Can Be A Condition For Divorce
The court can request a QDRO as a condition for divorce. Under the California Family Code, the court can impose several conditions before effecting a dissolution of marriage. One condition includes requiring a benefits plan to be included and requesting a temporary or provisional QDRO.
Tax Considerations That Affect QDROs
All qualified benefit plans are subject to IRS Sec. 401(a) and are also subject to QDROs. They include:
- Defined benefit plans
- Defined contribution plans
- Pension and profit-sharing plans
- 403(b) plans for public schools and the exempt organizations
- Employee stock ownership plans, also known as ESOPs
The Retirement Equity Act of 1984, abbreviated as REA, gives guidelines concerning the many hurdles between federal and state retirement laws. One significant issue this Act resolved was the alternate payee's taxation for the retirement benefits received from the employee's spouse through a QDRO. According to REA, the alternate payee receiving any distributions is subject to taxation. The payee is taxed in the same manner as the employee participant. However, it is crucial to note that the alternate payee is sometimes a minor. In this case, the tax distributions are taxed on the participant's spouse.
Who Is Responsible For Filing A QDRO?
A QDRO serves as a legal acknowledgment of an "alternate payee's" right to receive benefits from "qualified retirement plans" like retirement, 401(k), and pension plans.
When the law acknowledges that you are entitled to a legal claim to a share of your spouse's pension or retirement plan benefits, a QDRO can enable you to enforce your right to the plan's distribution. However, filing a QDRO requires a court ruling, judgment, or decree.
The beneficiary seeking a portion of the plan must submit a QDRO. For example, the spouse acquiring an in-kind share must file a QDRO to receive the benefit.
When your QDRO is approved, you can be paid straight from the pension or retirement plan instead of through your ex-spouse. As an "alternate payee," you are the immediate beneficiary of your share of the benefits. However, you must wait until the retirement plan's benefits have matured before receiving a payout. s
How To File For a QDRO In California
Before filing for a QDRO, you must obtain a court order, judgment, or decree declaring your rights. This can include a divorce decree, child custody order, domestic partnership dissolution decree, spousal support order, or child support order.
In your QDRO file, you have to include:
- The names and postal addresses of plan participants and alternate payees
- The amount or proportion of benefits that will be distributed to the alternate payee,
- The total number of payments required or the duration of the payment period, and
- Listing of all pension and retirement plans subject to the order.
You are not required to file a QDRO immediately after acquiring an ownership interest in a pension or retirement plan or after the plan matures or becomes due. However, the earlier you petition for a QDRO, the more effectively you can safeguard your rights. For example, if you delay submitting your QDRO until after your spouse's death, the retirement plan might no longer be able to pay out benefits. You can also lose the benefits if a subsequent spouse receives all of the plan's surviving spouse payouts before you file your QDRO.
You can file a QDRO immediately after your former spouse attains the "earliest retirement age" under their plan. This is known as the Gillmore election. It allows you to begin receiving retirement or pension benefits even if your former spouse refuses to retire and continues to work.
How Long It Takes to Access Funds After Filing A QDRO
A QDRO is often part of a broader divorce proceeding, and time frames vary. Some individuals finish everything in weeks. Others debate about the details for many months or even years. The less communication between you and your partner, the longer the procedure will take. Try your best to communicate, work through complex issues together, and be reasonable when making demands. When the payer gets the paperwork, the funds are transferred reasonably fast.
Whether There Is a Time Limit For Filing a QDRO
A QDRO is most effective when couples submit the paperwork during their divorce. The funds available here can help you understand alimony and child support obligations, among other things. There is no official timeline for QDRO filings. You can revisit this subject anytime during or even after your divorce.
However, in general, it is essential to discuss all of your financial concerns during your divorce. Timeliness and cooperation with your spouse can help you receive the benefits you deserve. Figuring things out early on can save you issues later.
The Cost of a QDRO Process
Divorces can be expensive, but it is best to be proactive when significant fees are involved. If you and your spouse agree on the terms promptly, you can complete the QDRO process for a few hundred dollars. However, you could pay thousands of dollars if you have complicated accounts and cannot reach an agreement. You could go to the extent of hiring professionals to help you determine what is equitable and fair.
Find An Experienced Divorce Attorney Near Me
Ignoring an issue, like pensions or retirement plans, will not resolve it. In the face of divorce, some people choose to overlook a QDRO because it is challenging to understand, but this is not in their best interest. QDROs are best handled at the discovery stage of your divorce case. Hiring a QDRO expert or a divorce attorney ensures you will have fewer hassles. If you need legal guidance regarding QDROs, our divorce attorneys at Los Angeles Divorce Lawyer can help. Contact us at 310-695-5212 to speak to one of our attorneys.
