One of the complicated aspects of many divorces is the divisions of property and assets. Retirement accounts can be particularly difficult to divide because of the tax liabilities and penalties for early distributions. Our Michigan divorce attorneys work with the courts and retirement account administrators to develop QDROs that avoid tax liabilities and penalties when dividing retirement accounts during a divorce proceeding.
Five Common Questions About QDROs
1. What is a QDRO?
A QDRO is short for a Qualified Domestic Relations Order. It is a domestic relations order that can be used to establish the right of a spouse to receive all or a portion of a retirement account that is not owned by the spouse. In other words, a QDRO instructs an account administrator to pay a portion of the retirement account to a non-owning spouse.
2. Who issues a QDRO?
In a divorce case, the judge assigned to hear the divorce issues the QDRO, if applicable. Typically, the attorney for the spouse who is receiving part of the other spouse's retirement account prepares the order for the judge's signature.
3. What types of retirement accounts are subject to a QDRO?
Any retirement account that is subject to ERISA (Employment Retirement Income Security Act) can be subject to a Qualified Domestic Relations Order. A QDRO can be used to divide retirement accounts, including, but not limited to, 401k accounts, pensions, profit sharing accounts, Individual Retirement Accounts, Roth IRAs, and 403b accounts. Military and government retirement accounts are not subject to a QDRO.
4. Are QDRO distributions subject to taxes and penalties?
When a QDRO is prepared correctly, the portion of the retirement account distributed to the alternate payee (non-owning spouse) should not be subject to early withdrawal penalties. The non-owning spouse can also avoid tax liabilities by rolling over the distribution into a qualified retirement plan.
5. Are there standard forms for a QDRO?
While there is not a standard form for a Qualified Domestic Relations Order, a QDRO must contain certain specific information for it to be honored by the courts, retirement account administrators, and tax authorities. For that reason, it is best to work with an experienced divorce attorney who understands how to prepare a QDRO.
Basic information that must be included in a QDRO for the division of a retirement account includes, but may not be limited to:
- The name and last known mailing address of the participant (the spouse that owns the retirement account);
- The name and last known mailing address of the alternate payee (the spouse who is receiving a portion of the retirement account);
- The amount or percentage of the account that is to be distributed to the alternate payee;
- The retirement account to which the order applies; and,
- Clearly specifies the type of benefits to which the order applies.
A QDRO cannot require the plan administrator to pay any benefit or amount that would not be payable to the participant. It also cannot require the plan administrator to take any action that would not be available to the participant under the plan.
If a QDRO does not contain all required legal elements or violates any of the provisions of ERISA, state laws, federal laws, or the plan, the plan administrator may have a legal reason to ignore the order.
Contact Our Michigan Divorce Attorneys for Help
If you have questions about dividing retirement plans in divorce, contact our Michigan divorce attorneys to discuss your concerns.
Property division, especially retirement benefits, is an important element of a divorce. The property settlement agreement can significantly impact your future financial wellbeing. Contact our office to gain valuable advice from a trusted Michigan divorce lawyer.