Make Sure You Receive Retirement Benefits from Your Former Spouse

Incident to divorce or separate maintenance (legal separation in some states), it is possible to divide retirement benefits that one spouse earned as an employment benefit or saved in an Individual Retirement Account (IRA)or other retirement savings, without making that division a taxable event. For example, husband worked for an auto company during the marriage and was eligible for a pension and a 401(k) plan. When he divorced, wife was eligible to receive a portion (usually half) of what accumulated during the marriage.

How does this happen? First it is essential that the division of the retirement assets be written into the court order. It is important to have the details of what portion of what plan is being transferred to wife written into the mediation/settlement agreement or judgment of divorce. To get it right, you should use the services of an experienced attorney who can confer with an employment specialist regarding the specific language for the plans involved in this case.

Second, make sure that the mediation/settlement agreement is incorporated into the judgment of divorce. This makes your agreement an order of the court.

Third, have the qualified domestic relations order drafted at the time the judgment is being finalized. Do not wait to have this done. Most employers or plan administrators will only honor the QDRO while the employee is living. If the husband should have an untimely death, the plan benefits might be lost. If husband changes the beneficiary or starts to draw on the plan or withdraws the money, it may be difficult to enforce the terms of the judgment.

It best to have the QDRO drafted by a specialist. Some divorce lawyers will draft them. It is up to the divorce lawyer. Most in the part of Michigan where I am licensed to practice will refer the QDRO to an employment specialist. Since we are dealing with employment benefits transfer, employment benefits specialists speak the same specialized language as the plan administrators. Occasionally problems in implementing the QDRO arise. Having a specialist available to talk/negotiate with the plan administrators can mean the difference between acceptance of the QDRO and months or years of frustration.

I do not recommend using the "do-it-yourself" options that some plans offer. I recently read two sample forms offered by two major auto manufacturers. The sample plans left out important benefits that are usually available for the person receiving the benefits. In one sample, they also omitted an important benefit for the employee that would benefit the plan, not the employee. In practice, we find the "do-it-yourself" submissions do not receive the timely review and approval that professionally prepared plans receive. In short, doing it yourself is penny wise and pound foolish.

Generally, QDRO's are only needed to divide employer provided plans or plans covered by ERISA. However, we are also finding that some IRA administrators are now requiring QDRO's. Your employment specialist can research this for you.

After the QDRO is drafted, your divorce lawyer will submit the order to the court for the judge's signature. It becomes effective when the plan administrator approves it. Usually, they will send a letter to the employee, the beneficiary of the QDRO and the attorneys. They will the divide the benefit. If it is a pension, husband and wife will each receive a check for the proportion each receives. This means they will each receive a 1099 at the end of the tax year, and each be taxed on the share he/she received. In the case of a 401(k), each will receive a portion of the total amount in the plan. Usually, wife will be encouraged to transfer her share into an IRA, moving her money into another tax-sheltered plan will not trigger a taxable event. Only when wife withdraws the money will she be taxed.

Retirement plans are often the greatest asset in a marriage. They deserve your close attention and help from professionals.