Dividing marital assets is part of every Arizona divorce. Pensions, 401(k)s, IRAs, and qualified retirement plans will be divided, too, when contributions were made during the marriage.
Spouses may each have their own retirement plans or it may be that only one has a pension because the other was a stay-at-home parent, for instance, or full-time university student. With divorce, it matters not whose name is on the pension as the plan participant – marital property must be equitably divided. It does matter what percentage of the retirement plan (if any) was funded during the marriage and, subsequently, what portion should be transferred to the non-participant spouse. After that is determined, the court will issue orders to carry out division of the retirement asset. This is where the QDRO comes in.
QDRO stands for Qualified Domestic Relations Order. Here are a few key points about QDROs:
For more information on QDROs in divorce, visit the website for the U.S. Department of Labor.
In Arizona, both spouses’ wages and salaries earned during the marriage are considered community income. The portion of any retirement benefits derived from marital earnings are community property and, as such, are divisible marital assets.
Of course, spouses may always settle the division of their community property by agreement. Doing so may or may not involve a QDRO to split a pension. What if there is no separation agreement settling the parties’ retirement assets? Then each spouse’s deferred employment compensation as acquired during the marriage – qualified pensions, 401(k)s, IRAs, and the like – is community property subject to a substantially equal division under Arizona divorce law.
We need to talk about Social Security at retirement age. An individual’s Social Security benefit is not determined by the court in a divorce. Even though work credits were earned during the marriage, Social Security benefits are not divisible as marital property.
Social Security income is a consideration when determining child support and spousal maintenance, though. Additionally, Social Security benefits may be garnished to pay a child support or spousal maintenance obligation, but neither of those purposes are accomplished with a QDRO.
We have a property settlement. We have a QDRO awarding a portion of one party’s pension to the other. The QDRO establishes the alternate payee’s right to a specified portion of the participating spouse’s retirement plan. But what does the QDRO actually do?
The QDRO provides two significant protections. First, it assures the required payment is made directly to the alternate payee. This prevents the plan participant from disposing of his or her share of the pension in violation of the divorce decree. Second, the QDRO ensures that each party is responsible for a proportionate share of the tax liability.
The QDRO instructs the retirement plan administrator to distribute a specified percentage of the participant’s benefit to the alternate payee. When both spouses have their own retirement plans, each plan may be divided in the divorce. Under the QDRO, for example, the pension administrator of the husband’s retirement plan would be ordered to pay a specified portion to the wife as alternate payee. Similarly, the wife’s IRA plan administrator would be ordered to pay husband a percentage of wife’s IRA.
Dividing a military pension pursuant to court order only exemplifies why service members, retired military, and their civilian spouses should consult a military divorce attorney with the Stewart Law Group. Consider the following two restrictions on direct payment from the military pay center:
When a military pension is divided as marital property, do not assume that the Defense Finance and Accounting Service (DFAS) will automatically send payments when presented with a QDRO. (Certainly, the Arizona court’s order is needed, but it may be in the form of a QDRO, divorce decree, or other order acceptable to the DFAS.)
With military retired pay, unless the 10/10 requirement is satisfied, DFAS will not send direct payments to the service member’s former spouse. For the division of the military pension as a property award in the Arizona divorce to be enforceable by direct payments from the DFAS, the following must be true:
In other words, a minimum of 10 years of marriage coincident with 10 years of active duty military service.
If either measure of the 10/10 requirement is not satisfied, then the civilian ex-spouse must use other collection methods. One of which is collecting the ordered-share of military retired pay from the service member himself or herself. Clearly, this can have practical difficulties. Talk to your lawyer about applying the 10/10 requirement to your specific circumstances.
How much a former spouse will receive directly from DFAS is limited as well. Assuming the 10/10 requirement is satisfied, direct payments from DFAS to a civilian former spouse are limited to 50% of the service member’s disposable military retired pay. Disposable retired pay is the total monthly retired pay to which a service member is entitled, less disability pay, federal debts, and applicable Survivor Benefit Plan annuity premiums. There may be exceptions.
When divorce involves a service member, consult an experienced military divorce attorney. Be prepared. Read as much about divorce as you can. Consider obtaining our new book: Arizona Military Divorce Essentials, for Service Members, Retired Military, and Their Civilian Spouses. Available on Amazon or through the Stewart Law Group.
Generally, the transfer between spouses of an IRA by QDRO in the divorce should not be a taxable event, but it must be done right. Talk to your tax attorney or CPA about what is required. QDRO benefits paid to a dependent child should be taxed to the plan participant, not the alternate payee. Also, the alternate payee in the QDRO may roll over a portion or all of the distribution received from the qualified retirement plan tax-free into a traditional IRA or other qualified retirement plan. For tax information about QDROs, see IRS Publication 504.
Retirement plans may involve a blend of separate and community interests, meaning part of the relevant employment occurred while the participant was unmarried (or while the divorce was pending) and part while married.
For Arizona property division in divorce, the following is but one method of calculating the community property share of the whole pension:
Take the number of months the plan participant was married and divide it by the total months of his or her participation in the plan. The resulting percentage is the community property percentage of the plan. The community property percentage of the plan is then divided equitably between the spouses in substantially equal portions.
Consider this example: Husband was married for 25 months, but participated in his retirement plan for a total of 100 months. 25/100 is .25 or 25%. If the plan held $100,000 at the time of the divorce, then the community property portion of that plan would be $25,000 ($100,00§0 x 25% = $25,000 in community property). The spouses, who have an undivided one-half interest in the community property, would share the $25,000 equally ($25,000/2 = $12,500 for each spouse). The remaining $75,000 in husband’s retirement plan is his separate property because he earned it before the marriage.
The pension plan does not need to be vested for it to be community property. If the participant has a traditional defined benefit plan, then an actuary is used to establish retirement age and life expectancy. If the participant has a profit sharing plan, 401k, or IRA, then the value of the plan is based on its current balance.
The plan administrator will not divide the participant’s pension between the two parties without the QDRO. Therefore, it is best to have the QDRO drafted early in the divorce and submit it along with the final decree for the court’s signature.
The QDRO may be included in the couple’s property settlement, incorporated into the court’s decree, or issued as a separate order. The decree establishes each party’s interest in each pension, but the QDRO – the court’s order to the plan administrator – is necessary to carry out the distribution. (There are exceptions. If the plan is a non-qualified annuity, for instance, then a QDRO is not generally required.) The QDRO is filed with all of the plan administrators who must comply with its terms when pension funds are released in conjunction with the plan participant’s retirement.
The legal expert who drafts the QDRO really needs to be involved early in the case to have the order prepared and ready when the final decree issues. Attempting to draft your own QDRO is not a good idea.
Seriously, QDROs are complex instruments and an error can be very costly and hit you at a time when you need the money the most. A QDRO legal specialist is recommended because this area of the law is so very technical and takes considerable legal acumen. The cost of the QDRO may be anywhere from $1,000 to $2,500 or more, depending upon the specific facts of the case. One QDRO does not fit all!
The QDRO is not a neutral instrument, one spouse or the other will benefit from it. By involving a QDRO expert while the case is pending, the pension division can be fully analyzed and negotiated with a full understanding of the ramifications under the order.
By way of example only, here are two possible distribution methods the spouses can negotiate with assistance from their family law attorneys:
Many employers offer sample QDROs on request. These may be useful guides as to what plan administrators’ expect and want from QDROs. An employer’s QDRO-sample will likely benefit that employer, though, by making pension administration simple and less costly to manage. Employers are focused on complying with state and federal law. They are not so concerned with protecting the rights of participants and alternate payees. That’s why parties hire Phoenix family lawyers to represent them.
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Divorce can come at any time in a couple’s marriage. Younger parties will continue working after divorce, funding their retirement accounts and securing their pensions. But mature spouses may be on the threshold of retirement or, perhaps, already retired and drawing pensions. The portion of a pension the non-participant spouse is to receive in the divorce can have a profound impact on what both parties have to live on in their retirement years. And there will be little or no time to recover the difference through late-in-life employment.
How retirement assets are divided in your divorce can have substantial financial consequences. Talk to a lawyer.