Why QDROs are Necessary for the Non-Participant Spouse of a Retirement Plan during Divorce
April 14, 2015
While there are a growing number of marriages where both spouses work full-time based on preference or economic necessity, there are still a fair number of marriages that have a more traditional economic makeup with a primary breadwinner and a stay-at-home parent. This type of scenario can place the stay-at-home spouse at a significant financial disadvantage in the event of a divorce. While the spouse working outside the family home might have been building a healthy retirement plan in the form of a pension or 401K, all such retirement accounts might be in the name of the family breadwinner.
Many families count their retirement plans (along with the family home) as among their most valuable assets. Kansas is an equitable property jurisdiction, which does not necessarily mean that property is divided equally. Rather, the term “equitable distribution” is more accurately defined as a “fair” division of marital property. Because the equitable distribution of assets during a divorce is essential to financial fairness and security for both spouses, a retirement plan that is in the name of one spouse might need to be partially allocated to the other spouse or accounted for by granting the non-working spouse other assets.
A retirement account like a 401K or pension might be considered to be part separate property based on contributions made prior to the marriage and marital property based on contributions during the marriage. If the parties to a divorce cannot reach a property settlement, the judge will have to determine whether the participant spouse should be entitled to retain ownership or monies paid into the fund prior to marriage and the return on such contributions. Alternatively, the judge might determine that the working spouse has made a gift of some or all of the contributions or earnings from contributions prior to marriage.
A portion of the retirement account will often be provided to either party, or at least a credit for part of the retirement, such as a swap between an interest in the family home and an interest in the retirement account. This is only part of the process of protecting each party’s financial interest in the retirement plan. Our Kansas law firm sometimes hear from parties granted a portion of their spouse’s retirement account in a marital settlement agreement or divorce judgment that ends up not receiving any portion of the retirement. The 401K or other retirement is released entirely to the participant spouse. While the other spouse allocated a portion of the retirement might still have the option of enforcing his or her rights directly against the other spouse, this remedy provides limited relief if the funds already have been spent.
Because many retirement accounts are subject to the Employee Retirement Income Security Act (ERISA), the Marital Settlement Agreement (MSA) and/or divorce judgment are not sufficient to protect the financial interests of the non-participant spouse in this situation. The parties must prepare a Qualified Domestic Relations Order (QDRO), which preserves the right of the non-participant spouse to have his or her portion of plan benefits distributed directly to the alternate payee spouse.
A QDRO is a domestic relations order that is specifically directed at the retirement plan. The binding order directs the plan administrator regarding the manner in which the proceeds are to be divided between the plan participant and the alternate payee. The QDRO provides a valid ownership interest in the fund to the alternative payee. The accuracy and complication of these documents makes it essential that the attorney who prepares the QDRO work closely with the plan administrator to ensure that the QDRO satisfies plan requirements.
Preparation of a QDRO is extremely important because federal law generally prohibits plan participants from transferring benefits out of the plan. The impact of federal law is that an MSA negotiated between parties to a divorce cannot bind the ERISA plan administrator in terms of the distribution of ERISA plan benefits. A properly drafted QDRO will ensure that the alternate payee receives his or her share of the retirement plan and that the distribution does not constitute a taxable event.
If you have questions about the division of assets during a Kansas divorce, we welcome the opportunity to talk to you and answer your questions. We invite you to call the Kansas Family Law Attorney at the Weber Law Office or to submit an inquiry form through this website to schedule your initial consultation.