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Do you know enough about the division of retirement accounts? - III

In today's post, we'll conclude our discussion of how anyone going through a divorce -- both young and old alike -- must pay especially close attention to the division of their 401(k)s, pensions and other retirement accounts, as these might actually be their most valuable asset.

To that end, we've been discussing how the division of these accounts in a divorce should be accompanied by the creation of a Qualified Domestic Relations Orders -- or QDRO -- which is essentially a judgment/decree that provides retirement fund or pension plan administrators with the necessary instructions on how to divide retirement assets.

What type of information do QDROs need to omit?

While a complete breakdown is clearly beyond the scope of a single blog post, the Employee Retirement Income Security Act of 1974 (ERISA) dictates that a QDRO must generally omit provisions calling for any of the following:

  • Non-employee spouses (i.e., the alternate payees) to be provided with any type of option or benefits not otherwise called for under the terms of the plan
  • Non-employee spouses to be provided with increased benefits
  • Non-employee spouses to be provided with benefits that have already been earmarked for a different former non-employee spouse under the terms of another QDRO  

Can a QDRO be completed after the divorce is finalized?

While a QDRO can be completed after a divorce is finalized, many experts advise against waiting this long given that it can have unforeseen consequences for the non-employee spouse seeking their share of retirement assets.

By way of illustration, consider a scenario in which a non-employee spouse, wanting immediate access to a sizeable cash sum to cover various expenses, agrees to a lump sum payment from their ex's pension plan.

Here, the divorce is finalized and the QDRO later completed. However, when the QDRO is presented to the pension plan administrator, it's rejected as the plan can only pay the non-employee spouse in accordance with the terms of the pension plan -- meaning monthly payments beginning around the age of retirement.

This can be problematic for the non-employee spouse for several reasons. First, since the divorce has already been finalized, they cannot request other property of equivalent value from the court. Second, they won't have access to the lump sum payment that they needed to cover immediate expenses.

Had the QDRO been completed, presented to and rejected by the pension plan administrator before the divorce was finalized, property division negotiations could have resumed in earnest.

What all of the foregoing conversation has served to highlight is that QDROs are one of the more complex property division issues in any divorce. As such, it's absolutely imperative that they are handled by an attorney with the necessary skill and experience.

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