Idaho is a community property state. Simply put, all assets and property acquired by either spouse during the marriage is considered community property. This can make property division contentious, especially when retirement benefits are involved. Many people face the concerning reality of having to split their retirement accounts in half before the account becomes eligible for withdrawals. Depending on the duration of the marriage and the age of the parties seeking a divorce, an individual’s retirement benefits may be their largest asset subject to division.
Understanding the Qualified Domestic Relation Order
The Employee Retirement Income Security Account Act of 1974 (ERISA) generally prohibits the assignment of retirement benefits to anyone other than the plan participant. This prohibition, combined with the early withdrawal penalties, can complicate things when parties are going through a divorce.
Enter the Qualified Domestic Relation Order, often referred to as a QDRO. A QDRO is a domestic relations order that divides certain qualified retirement plans after divorce, assigning applicable retirement assets to a person that is not the account holder.
If done properly, the QDRO creates an exception to the rule that withdrawing retirement assets prematurely will cause a penalty or create taxable income for the account participant and allows a portion of the retirement benefit to be allocated to the former spouse.
A QDRO allows for a retirement plan to pay child support, alimony or give marital property rights to a spouse, former spouse, or child of the participant.
Types of Retirement Plans: A Breakdown
Retirement accounts come in many forms and are divided into two categories: defined contribution plans and defined benefit plans. Retirement plans also vary based on who is contributing funds to the account.
Defined Contribution Plans vs. Defined Benefit Plans
In a defined contribution plan, the retirement benefit depends on the total contributions made during the plan’s lifetime. The participant will ultimately receive the amount they invested, plus or minus the gains or losses. Examples of a defined contribution plan include the 401(k), 403(b), and Traditional IRA. In contrast, a defined benefit plan, promises a specific monthly benefit in retirement, based on an employee’s salary and years of service.
For example, a government pension.
Employee Sponsored Retirement Accounts vs. Individual Retirement Accounts (IRAs)
Typically, in an employee-sponsored retirement account, the account holder and their employer both contribute to the account. Employee-sponsored retirement plans include the 401(k), 403(b), pensions, and other similar plans. In contract, an Individual Retirement Accounts is solely funded by the account holder’s contributions and investments. These include the traditional IRA, Roth IRA, and others.
Understanding if Your Retirement Account Needs a QDRO
If you are required to divide employee-sponsored retirement plans after your divorce, you will need a QDRO. So, if your divorce decree requires you to divide your 401(k), 403(b), pension, other ERISA governed plans such as employee stock ownership plans and profit-sharing plans, you will need a QDRO to split the retirement account.
Individual Retirement Accounts typically don’t need a QDRO because the plan participant can simply make a request called a “transfer incident to divorce.” This will transfer the correct portion of benefits to your former spouse’s IRA.
Do I need to Request a QDRO?
A QDRO is not an automatic property division tool in Idaho’s divorce process. When the court orders division of the community property, or the parties agree upon a division, one of the parties must request a QDRO. Once the domestic relations order is prepared and approved by the court, it will then need to be qualified by the retirement plan. Once qualified, the funds will be dispersed to the ex-spouse pursuant to the plan. The entire process can
take between three and five weeks.
The party holding the retirement account is the “participant”, and the party receiving a portion of the participant’s account is the “alternate payee.” Generally, the spouse who is the designated alternate payee will request the QDRO. So, if you have been awarded a portion of your spouse’s employee-sponsored retirement plan, you need to request a QDRO to ensure you get your portion of the benefits.
Validity of a QDRO
To be valid, the QDRO must meet specific requirements. The order itself must direct the retirement plan administrator on how exactly to divide the asset and provide the identifying information necessary to enable the administrator to identify the plan, the parties, and divide the assets according to the domestic relations order.
General Steps to Draft a QDRO
- Your attorney will gather all necessary information, including the retirement account information and specific asset allocation in the divorce decree.
- The QDRO must be drafted to clearly state the purpose of the order, identify all parties, and specify how to divide the benefits.
- Pre-approval. Your attorney may submit the drafted QDRO to the plan’s administrator for pre-approval. Not all plans offer pre-approval. However, if they do, it can be a useful tool to ensure the order contains all the necessary information before it is finalized.
- Both the plan participant and the alternative payee will need to approve the QDRO before it is finalized and presented to the court for a judge’s signature.
- Once the judge signs the QDRO, your attorney should obtain a certified copy and send it to the retirement plan administrator.
- Once the QDRO is accepted, the plan administrator will implement it and divide the assets accordingly.
Executing a valid QDRO is a complex process. We recommend you consult with an experienced attorney to ensure the retirement assets subject to division after your divorce are properly divided, to guarantee you face no tax penalties and minimal delays.
