What is a Qualified Domestic Relations Order?
In many divorce cases, the most lucrative assets of the estate are retirement benefits. This includes pension plans, 401k plans, 403b plans, and Individual Retirement Accounts, among other retirement assets. Under Wisconsin law, all such retirement benefits, whether pre-marital or marital, are presumptively divided equally at the time of the divorce. On a shorter term marriage, the court can consider a deviation from 50/50 to give credit to the pre-marital portion, but it is not automatic. The court has to consider all of the factors listed under s. 767.61 of the Wisconsin Statutes.
So, how do the retirement benefits actually get divided at the time of the divorce? Is it enough to simply state in a settlement agreement that each gets half? Are the benefits cashed in and each receives their half that way? Is there a way of transferring the retirement benefits without cashing them in to avoid having to pay taxes on such benefits, that are tax deferred. Keep in mind there is also a 10% early termination penalty for benefits cashed in prior to 59 1/2, under the IRS rules.
The way retirement benefits are typically divided in a divorce or legal separation is by a document entitled “Qualified Domestic Relations order” (or “QDRO.”) This is a legal document that is prepared by either the divorce lawyers or contracted out by companies specializing in the division of retirement benefits. The document is prepared and sent to the plan administrator for the retirement asset in advance, to get their approval prior to being submitted to the court. The attorneys also review the document and once it is approved by the plan administrator, it is signed by the attorneys and submitted to the court for approval. Once the court has approved the order, a certified copy is obtained and that document is sent to the plan administator for dividng the retirement account.
This is all done without having to cash the retirement benefit in, and without tax consequences to either party in dividing the retirement asset by way of the QDRO. One needs to be cognizant of the fact that the QDRO cannot add anything to the division of the retirement benefit that isn’t specifically spelled out in the settlement agreement itself or if the case went to trial, in the order of the court. So, things to consider in the negotiating of a settlement as to what should be included for the division of the retirement benefit should cover such topics as:
- Whether the asset includes plus or minus gains, from the date of the divorce to the date of division?
- Whether the retirement benefit includes a survivor benefit, and if so, how does that affect the benefit and who pays for the benefit?
- Who pays for the cost of the QDRO and who is going to be employed to draft the document?
- Whether the asset should be divided as a fixed dollar amount or as a percentage order?
- Whether a beneficiary designation needs to be elected as part of the QDRO?
There may be other issues that need to be addressed as well in the settlement papers for the division of the retirement asset via a qualified domestic relations order.
If you have questions on how to divide up retirement assets when going through a divorce, contact the experienced family lawyers at Karp & Iancu, S.C. today for a free consultation. We have been helping 1000s of clients go through a divorce for over 37 years.