QDROs in a Wisconsin Divorce: What They Are and How They Work

A divorce judgment may award one spouse part of the other spouse’s retirement plan. For many plans, though, no money moves until the plan administrator receives a separate court order.

What Is a QDRO?

A qualified domestic relations order, commonly shortened to QDRO, is a court order used to divide certain retirement benefits. The person whose benefits are being divided is called the participant. In a divorce, the spouse or former spouse receiving a share is called the alternate payee.

Federal law generally prevents many private employer retirement plans from paying a participant’s benefits to someone else. But a QDRO creates an exception when benefits are divided in a divorce or used to provide support. 29 U.S.C. § 1056(d)(1), (3)(A)–(B).

Put simply, the divorce judgment says who is entitled to the retirement benefit. The QDRO tells the plan how to make the payment. It allows the retirement plan to pay the alternate payee instead of relying on one former spouse to forward money to the other.

Without an accepted QDRO, the account may remain entirely in the participant’s name despite what the divorce judgment says. The problem sometimes goes unnoticed until the participant retires, withdraws money, or dies. But by then, correcting it may be much harder.

How Are Retirement Benefits Divided in a Wisconsin Divorce?

Pensions and retirement accounts are generally included in the property divided in a Wisconsin divorce.

Wisconsin begins with a presumption that property subject to division will be divided equally, although the court may reach a different result after considering the statutory factors. Those factors include the length of the marriage, the property each spouse brought into the marriage, the spouses’ contributions, their financial circumstances, and the tax consequences of the division. The statute specifically includes both vested and unvested pension benefits. Wis. Stat. § 767.61(3).

That does not mean every retirement account must be split down the middle. The court looks at the property division as a whole. One spouse might keep a retirement account while the other receives more equity in the home or other property. In another case, dividing the retirement benefit itself may produce the fairest result.

Retirement benefits are not automatically excluded from property division simply because the account is in one spouse’s name or some of the benefits were earned before the marriage. The court may consider that premarital portion when deciding whether a different division is appropriate. Hokin v. Hokin, 231 Wis. 2d 184, 193–94, 605 N.W.2d 219 (Ct. App. 1999).

Which Retirement Benefits Require a QDRO?

QDROs are commonly used to divide private employer-sponsored plans, including:

• 401(k) plans;
• private-employer 403(b) plans;
• traditional pensions;
• profit-sharing plans; and
• employee stock ownership plans.

Usually, each plan receives its own order because benefit structures and administrative procedures differ. A person with a pension and a 401(k), for example, may need two separate QDROs.

IRAs do not use QDROs. Instead, the divorce judgment states how the IRA will be divided, and the awarded share is transferred directly to an IRA for the other spouse. Federal law does not treat that transfer as taxable. 26 U.S.C. § 408(d)(6).

What Happens During the QDRO Process?

The process begins with the divorce judgment or settlement agreement, which identifies each retirement plan and the share awarded to each spouse. A family law attorney or QDRO specialist then reviews the plan’s procedures and prepares the proposed order.

After the judge signs the order, it is sent to the plan administrator. The administrator separately decides whether the order satisfies federal law and the plan’s rules. If the plan rejects it, revisions may be needed.

The order may need to address details such as the valuation date, account gains or losses, outstanding loans, payment timing, and survivor benefits. Review times vary, but federal law requires the administrator to make its decision within a reasonable period and notify the participant and alternate payee. 29 U.S.C. § 1056(d)(3)(G)(i)(II).

Who Pays the QDRO Fees?

There is no single answer for every case, as the QDRO cost and responsibility for paying it can vary.

The spouses may agree to split the cost of preparing the QDRO, or one spouse may agree to pay it as part of the broader property settlement. If they disagree, the court may assign responsibility. Either way, the divorce judgment should address the cost clearly.

Some retirement plans may charge a separate fee for reviewing and processing the order. Whether a fee applies and how it is charged depends on the plan’s terms.

If a former spouse refuses to provide information, pay an assigned share of the cost, or take another step required by the divorce judgment, the other spouse may need to ask the court to enforce the judgment. Leaving the QDRO unfinished may jeopardize the intended division.

What Are the Tax Consequences?

How the recipient takes the money affects when taxes are due. If the awarded share is moved directly into an IRA or another eligible retirement plan, income tax is generally postponed until the money is withdrawn. If the recipient instead takes cash directly from the original plan under the QDRO, the payment is generally taxable income, although it usually avoids the additional 10% tax on early distributions. That exception may not apply if the money is first rolled into an IRA and withdrawn later. 26 U.S.C. § 402(a), (c)(1), (e)(1); 26 U.S.C. § 72(t)(2)(C).

Do Different Rules Apply to Government or Military Benefits?

Government and military retirement benefits do not necessarily use the same QDRO process as private employer plans. Each system has its own rules.

Wisconsin Retirement System Benefits

The Wisconsin Retirement System covers many state and local government employees, including public-school teachers, police officers, firefighters, and Universities of Wisconsin employees. Its benefits are divided through a domestic relations order that must meet Wisconsin law and be accepted by the Department of Employee Trust Funds. A court may award the former spouse no more than 50% of the participant’s account or annuity. Wis. Stat. §§ 40.02(48m), 40.08(1m).

Federal Civilian Retirement Benefits

Federal employees covered by the Civil Service Retirement System or Federal Employees Retirement System also follow different rules. Instead of a standard QDRO, dividing those benefits requires a court order written to comply with the Office of Personnel Management’s regulations. 5 C.F.R. §§ 838.101, 838.302(a).

Military Retired Pay

Military retired pay is not divided through a QDRO. Instead, it is governed by the federal Uniformed Services Former Spouses’ Protection Act.

Federal law allows Wisconsin courts to treat certain military retired pay as property in a divorce. 10 U.S.C. § 1408(c)(1).

The often-misunderstood “10/10 rule” affects how payments are made, not whether a court may award the former spouse a share. When at least ten years of marriage overlapped with at least ten years of creditable military service, the former spouse may generally receive property-division payments directly from the federal government. 10 U.S.C. § 1408(d)(2).

If the 10/10 requirement is not met, the court may still award the former spouse a share, but the service member may have to make the payments directly. Federal law also limits what retired pay may be divided and which courts have authority to divide it. 10 U.S.C. § 1408(a)(4), (c)(4).