During your marriage, all the property, assets, and debts that you acquired become part of the marital estate. This includes your retirement accounts like pensions, 401(k)s, and IRAs. Dividing such plans so that they do not trigger penalties is tricky. You need the plan administrator and the court to sign off on a major change like distributing half of the account into a new account. This is also true of several different government retirement plans, such as the Civil Service Retirement System (CSRS), the Federal Employees Retirement System (FERS), and the Thrift Savings Plan (TSP). In this article, the Sacramento, California, divorce lawyers at Wagner Family Law will discuss QDROs and what government employees should bear in mind during their divorce.
What is a QDRO?
According to the IRS, a QDRO, or Qualified Domestic Relations Order, is a judgment, decree, or order for a retirement plan to pay child support, alimony, or marital property rights to a spouse, former spouse, child, or other dependent of a participant. Essentially, the QDRO allows for the division of retirement benefits without triggering penalties or tax consequences. QDROs are especially useful during a divorce when marital property must be divided among the two spouses. Retirement benefits are among the types of property that are divided during a divorce. It is thus a crucial part of property division as it ensures that the non-employee spouse receives their fair share of the retirement assets without incurring tax penalties or liabilities that are generally associated with early withdrawals.
What does a QDRO do?
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Divides retirement benefits - QDROs specify how retirement plan benefits will be split between divorcing parties.
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Ensures fair distribution - QDROs ensure that a non-employee spouse receives their portion of their spouse's retirement assets, as agreed upon in the divorce settlement.
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Avoids penalties and taxes - QDROs allow retirement benefits to be transferred without incurring the standard 10% penalty for early withdrawals. This penalty would apply if the funds were accessed before the normal retirement age.
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Protects plan administrator from liability - QDROs protect the plan administrator from potential liability by ensuring that the benefits are distributed in accordance with the court order.
QDRO requirements
A QDRO must include specific information to be considered valid. This includes the names and addresses of the plan participant and each alternate payee, the name of the plan, the dollar amount or percentage of benefits to be paid, and the number of payments or time period to which the order applies. In addition, the QDRO must comply with the plan's policies and procedures.
A QDRO must include:
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Identifying information - The QDRO must clearly identify the employee with retirement benefits and each alternate payee (like a spouse or former spouse). You would need to include their names and last known mailing addresses.
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Plan identification - The order needs to specify the name of each retirement plan that is subject to the QDRO.
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Benefit division - The QDRO must decide how the retirement benefits will be divided. This could be expressed as a specific dollar amount, a percentage of the benefits, or a method for calculating the amount.
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Payment details - The QDRO should specify the number of payments or the time period over which the benefits will be paid to the alternate payee.
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Compliance with plan rules - The QDRO is required to adhere to the rules and regulations of the specific retirement plan.
In addition, the QDRO cannot require the plan to provide a benefit that is not already available under the terms of the plan. The order cannot require the plan to increase benefits beyond what is allowed under the plan's terms. Further, the QDRO cannot require the plan to pay benefits to an alternate payee if it already owed another alternate payee under a previous version of the QDRO.
Key federal retirement assets affected by divorce
Two of the most common retirement plans offered by the federal government are:
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FERS pension - To divide a FERS pension in divorce, you generally need a Court Order Acceptable for Processing (COAP). The COAP outlines precisely how the pension is supposed to be split. This is generally done as either a percentage of the monthly benefit or a fixed dollar amount. The division can take effect when the federal employee retires. Payments to the former spouse are made directly by the Office of Personnel Management (OPM).
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Thrift Savings Plan (TSP) - To divide a TSP, you need a Retirement Benefits Court Order (RBCO). The RBCO will specify the exact percentage of benefits to divide during your divorce. The former spouse can choose to withdraw the funds or roll the assets into their own IRA or retirement plan to avoid taxes and penalties.
What is the role of the Thrift Savings Plan in divorce?
After the RBCO is processed, the TSP remains tax-deferred, so long as the former spouse rolls over their portion into an IRA or other qualified plan. If the funds are withdrawn directly, they will be subject to taxes and early withdrawal penalties.
Deposits into a TSP are made on a pre-tax basis. In other words, they are not taxed on their way into the plan, and they are taxed upon withdrawal. The recipient thus owes taxes on the amount received. By contrast, deposits to a Roth TSP are made after the assets have been taxed. Withdrawals are made tax-free so long as the account holder meets specific requirements.
The bottom line
Dividing retirement accounts during your divorce is a complex process. You will need a different order depending on your plan, and this can become very confusing. It is not something that you would want to take on by yourself. Not only could your proposal be rejected by the plan administrator, but you may incur tax penalties if it is not done properly. It, therefore, helps to have the aid of a skilled and experienced divorce attorney during the process.
Talk to a Sacramento, CA Divorce Lawyer Today
Wagner Family Law represents the interests of government employees during their divorce. Call our office today to schedule an appointment, and we can begin addressing your unique concerns right away.
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