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QDROS for 401(k), 403(b) and 457 Plans

by Madeline Hill | Jun 27, 2012 | Defined Contribution Plans

The two most common types of retirement plans are defined benefit plans and defined contribution plans. Defined contribution plans have an account balance, such as 401(k), 403(b) and 457 plans. Defined benefit plans are commonly known as pension plans and pay a monthly benefit in the future with the amount payable determined at the time of retirement.

This blog will briefly discuss the most common issues involved with dividing defined contributions plans due to divorce. These issues are: defining the community property interest, determining how the plan will treat investment gains and losses on the alternate payee’s portion, and deciding how to treat outstanding loans.

DIVISION OF COMMUNITY PROPERTY INTEREST

Parties to a divorce can agree to transfer any percentage or dollar amount to the non-employee spouse (a.k.a. the “Alternate Payee”). Often, funds from 401(k), 403(b) or 457 plans are used to equalize other marital assets during divorce. However, the most common division is the community interest division. This means that the Alternate Payee will receive one-half of the contributions from the date of marriage through the date of separation. Usually, the plan administrator can calculate this amount; however, in some situations the record keeper for the plan will not have records that date back to the date of marriage. If the record keeper does not have adequate records, then this information will need to be supplied by the parties via old plan statements, or the parties can hire an actuary or accountant to estimate the community property interest, and then can stipulate to the amount to be transferred.

GAINS & LOSSES

Typically, gains and losses (or “earnings”) attributable to the amount assigned to the Alternate Payee are also applied to the amount. However, the parties can come to an agreement where earnings are not awarded on the Alternate Payee’s share. If the parties determine a flat dollar amount to be assigned to the Alternate Payee, gains and losses are usually not included. Gains and losses can make a significant difference in the amount of the benefit awarded to the Alternate Payee, so this issue should be considered seriously by the parties.

PLAN LOANS

Another important issue is the treatment of any loans that are outstanding with the plan as of the date of account division. When a percentage of the account is assigned to the Alternate Payee, including an outstanding loan in the account balance, i.e. adding the amount of the loan back in, will result in a larger portion for the Alternate Payee. Subtracting the outstanding loan from the account balance will reduce the amount paid to the Alternate Payee. Usually, the parties will evaluate when the loan was taken out by the Plan Participant and what the funds were used for to determine if the loan should be considered a community loan (included in the account) or the Participant’s own loan (excluded for the purposes of calculation). It is important to know that loans from retirement plans are not assignable, the Participant must pay the loan back even if loans are included for purposes of division. This also means that if 100% of a plan is being assigned to the Alternate Payee, there must not be any plan loans. If there are any outstanding plan loans, then an amount sufficient to cover the loan must be left in the account.

TIMING & TAX ISSUES

Parties should also be aware of timing and taxation issues for defined contribution plan QDROs. Plans will usually allow an immediate distribution to an Alternate Payee. The Alternate Payee may roll the assigned amount to an IRA, take it in cash, or do some combination of IRA rollover and cash distribution, subject to the terms of the plan. If the Alternate Payee is allowed to leave the funds in the plan, the funds usually cannot be accessed without penalty until he/she reaches age 59 ½.

Regarding the taxation of benefits upon distribution, Alternate Payees are responsible for the income taxes on any distributions made to them pursuant to a QDRO. The distribution from the plan is taxable to the participant for distributions made for child support or distributions made without a QDRO. The plan will withhold 20% of any immediate cash distribution for federal income tax, but there is no 10% excise tax when an alternate payee takes a distribution from a qualified plan pursuant to a QDRO. This can help an alternate payee who needs cash before they turn age 59 ½.

Almost all defined contribution plans are divisible by QDRO. The parties’ judgment, divorce decree or marital settlement agreement should address the issues listed above since the QDRO should reflect the judgment and having a written agreement prior to drafting a QDRO will allow for the QDRO process to run more smoothly and efficiently.

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QDROs for Child Support and Spousal Support

by Madeline Hill | Jun 14, 2012 | General QDRO Info

The most common use of a Qualified Domestic Relations Order (QDRO) is for the division of marital property. However, QDROs can also be used for child support and spousal support, and to collect arrears for these types of support. Retirement funds for support obligations are often overlooked by family law attorneys, but in many cases may be the only source of funds available. Unlike garnishment of wages, once a QDRO for support is entered by the court and accepted by the retirement plan administrator, even if the employee spouse moves out of state, quits his/her job, or minimizes taxable income by being paid in cash, a properly structured QDRO will ensure payment of outstanding support obligations.

Before assuming that a QDRO will solve all of your support problems, you should be aware of certain retirement plan limitations and other obstacles, which we have outlined for you below. We also explain how different types of retirement plans work better for arrearages than others. It is critical to remember that retirement plans are not forced to comply with California family law; if there is a conflict between the terms of the plan and the QDRO, the terms of the plan prevail.

Types of Plans and Timing

The two most common types of retirement plans are defined benefit plans (traditional pension plans) and defined contribution plans (such as 401(k) plans). QDROs will usually not be approved by the plan if QDRO changes the standard method of payment by the Plan.

For defined benefit plans, payments can usually only be made once the employee has reached the earliest retirement age allowable by the plan, and the payments will be made on a monthly basis. This means that if a person is a long way from retirement, it may be years before the retirement plan assets become available for support obligations. Defined benefit plans are best for a monthly support obligation for an employee who is at or very near to retirement age. Support QDROs for pension plans should specify the amount that the alternate payee will receive each month. Typically a lump-sum amount for support arrears will not be payable by a defined benefit plan. Unless the employee spouse obligated to pay support is already retired, a pension plan QDRO may not be an immediate solution.

In contrast, defined contribution plans are ideally suited for payment of lump sum child or spousal support arrears. Once you obtain a court order saying the lump sum that is owed, it is a fairly straightforward process to get a QDRO in place for the payment of that lump sum from a defined contribution plan. It is also important to note that more than one support QDRO can be filed for each retirement plan. For example, one QDRO could be filed for arrearages from 2001-2005 and another could be filed for arrearages from 2006-2011. Unlike pension plans, most defined contribution plans will not honor an order for a payment to be made for a support obligation on a monthly basis. Rarely, if a defined contribution plan is the only support asset for child support or for long term spousal support, then a court may order that a lump sum be withdrawn from the defined contribution plan. The lump sum would then be placed in an interest-bearing account and the monthly support payments could come from the account.

Tax Issues

The QDRO should always specify the tax responsibility of the parties, otherwise the plan may just assign tax liability to the recipient of the funds. However, the general rules are: (1) for child support, the employee (plan participant) is liable for taxes on the amounts paid out for current or back child support; and (2) for spousal or family support, the recipient (alternate payee) must pay taxes on the amount received by him/her. Often for defined contribution plans, the plan will automatically withhold 20% of any distribution, so the total amount of the payment may need to be adjusted to account for tax issues.

The Process for Child Support or Spousal Support QDROs

In the simplest terms, the process for obtaining a QDRO for back child support or spousal support is:

Locate the original judgment or court order that said what amount was to be paid (i.e. the original order for $500/month child support).
For child support, you can contact the state/county child support agency to obtain a record of the amount owed.
Have a QDRO drafted by an attorney or utilize form FL-460.
Send the draft QDRO to the plan administrator for approval, revise if necessary.
Once approved by the plan administrator, obtain the parties signature on the QDRO and file it with the court.
Send a certified copy of the QDRO filed at court and signed by the judge to the plan administrator.

Questions?

If you have questions about QDROs for spousal support or child support you should consult with your family law attorney or contact an attorney at QDRO Helper by calling 619-786-QDRO (7376).