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Costly Mistakes Made When Dividing Retirement Assets After Divorce

QDRO.jpgA Qualified Domestic Relations Order (QDRO) is an order that needs to be included in a divorce settlement agreement to provide former spouses their share of Erisa qualified retirement assets. 

QDROs can also be used to facilitate alimony and child support payments.

They're not required to divide IRAs or non-qualified plans, such as deferred compensation plans, supplemental pension plans, long-term incentive plans or stock ownership plans. 

There are three common mistakes when dividing qualified retirement assets (e.g. 401(k) plans) and non-qualified retirement assets  during a divorce:

1-Not considering potential tax consequences and liabilities;

2- Not defining the method by which a traditional pension plan is to be divided; and

3- Not accounting for the treatment of investment gains or losses in the context of the division. 

The QDRO should be written to provide that 100% of the alternative payee's benefit shall be distributed or rolled over to an eligible retirement account designated by the alternate payee. As long as he or she refrains from requesting that all or part of the benefit be distributed in cash, the transfer of assets will not be taxed.

For defined contribution plans, such as 401(k) plans, the order should provide that, in the unlikely event that the alternate payee dies prior to receiving the full intended benefit (and no other designation is in place), then the unpaid benefit shall be distributed to his or her estate. Further, the QDRO should provide that, if the plan participant dies prior to the transfer, then the alternate payee is to be treated as the surviving spouse for the amount of the intended benefit.

For defined benefit plans, including traditional pension plans, as a general rule, if the alternate payee dies prior to actually receiving benefits from the plan, then his or her intended benefit reverts back to the plan participant.

If the plan participant dies before the alternate payee, but after the alternate payee has started receiving benefits, then the plan participant's death generally has no impact on the other spouse's intended benefit. But, if the plan participant dies before the alternate payee's benefits commence, then generally, the intended benefit granted by the QDRO will be extinguished and replaced by whatever "survivorship" options are preserved and allocated to the alternate payee by the terms of the QDRO.

Again, important survivorship protections for the alternative payee can be preserved or omitted by terms of the QDRO. 

Plan administrators of ERISA qualified plans generally have the ability and the data to calculate investment performance for many years after the divorce. A rollover of the assets held by the plan from one financial institution to another sometimes frustrates this task. If the plan terms and the available data permit the plan administrator to calculate the investment performance, the plan administrator always prefers to perform the calculation. If the data for the relevant timeframe isn't available, the plan terms often provide for a "default" formula. Absent a "default" formula, the parties must reach an agreement on their own. If that is not possible, the court is likely to require the payment of interest on the alternate payee's intended benefit at the legal rate that applies to unpaid debts.

Should you be in the midst of a divorce or contemplating divorce, contact the Law Offices of Renee Lazar either through email or telephone 978-844-4095 to schedule a FREE one hour no obligation consultation.

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Law Offices of Renee Lazar
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Bedford, MA 01730
Phone: 978-844-4095
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