In the process of getting a divorce, the division of property is likely to be an important component of the split. In fact, how this happens may have a significant impact on your own financial future. Within the division of assets, the judge might award a portion of one spouse’s retirement benefits to both spouses. Indeed, other than real property, a retirement account may be the parties’ most valuable asset. Like other assets that are acquired during marriage, the wages that are put aside or otherwise accrue in a retirement or pension account are considered community property.
Both parties can come to an agreement on their own as it relates to the retirement accounts. Without this, however, a deferred employment compensation in the form of an IRA, qualified pension, or 401(k) is considered community property and can be divided between the spouses. This is done using a document called a qualified domestic relations order (a “QDRO”).
What Is a QDRO?
This official court order carries out the property settlement as it relates to retirement benefits. This establishes the other spouse as an “alternate payee” for some portion of the plan participant’s retirement funds. The QDRO is essential because even with a divorce decree stipulating that one spouse is entitled to benefits from the other’s funds, this cannot be carried out without a separate order. Further, a QDRO ensures that neither party has to pay taxes or penalties on the transfer since no one “withdraws” money from their retirement account in order to pay the other spouse for their share.
The QDRO signifies to the plan administrator that the retirement plan must pay a certain percentage of benefits to this alternate payee. If both parties have a deferred compensation plan, each one might be divided or, if possible, the accounts may be “offset” against one another to cut down on the number of required QDROs. You can see how this becomes very complex when multiple retirement plans are involved. It’s important to note that the funds in question are those earned, vested, or funded during the course of the marriage, as that is the only portion of the account that meets the community property standard.
In order for a QDRO to be accepted, it has to be approved by both the plan administrator and the judge in the case. It’s imperative that a qualified attorney prepares the QDRO and that your Arizona family law attorney has provided guidance on the appropriate language to use in the Decree in order to effectuate the parties’ or Court’s intent with respect to the division of retirement assets.
Mistakes to Avoid
Lack of clarity in your QDRO can lead to legal battles down the road or denial of payment the alternate payee expected. One of the most common things causing disputes is the date of valuation for plan benefits, so make sure this is clearly outlined in the Decree of Dissolution and the QDRO so there is no confusion about the amount or percentage to be given to the alternate payee.
A second major issue that causes a lot of problems is forgetting about survivor benefits. Without specific verbiage, an alternate payee may lose out on benefits if the original participant passes away either before or after retirement. Make sure your Arizona family lawyer has experience in working with qualified domestic relations orders and is confident in his or her ability to represent your interests in the with respect to dividing retirement interests.
This blog should be used for informational purposes only. It does not create an attorney-client relationship with any reader and should not be construed as legal advice. If you need legal advice regarding What Is A QDRO?, or any other family law issue, please feel free to contact Steven H. Everts at 480.461.5300, log on to udallshumway.com, or contact an attorney in your area. Udall Shumway PLC is located in Mesa, Arizona and is a full service law firm. We assist Individuals, families, businesses, schools and municipalities in Mesa and the Phoenix/East Valley.