A federal statute called the Employee Retirement Income Security Act (ERISA) governs most retirement plans. To divide a retirement plan upon divorce, a court must sign a domestic relations order. Once the Plan Administrator of the retirement plan approves the domestic relations order, it becomes a Qualified Domestic Relations Order (QDRO). In the absence of a QDRO, a court cannot divide retirement benefits, even if the divorce decree provides otherwise.
A Qualified Domestic Relations Order (Acronym – QDRO and pronounced “Quad-Row”) is a Court Order that splits up various types of retirement accounts. Federal law (ERISA) generally does not permit state court judges to require that the person who administers a retirement account (the “Plan Administrator”) immediately pay retirement benefits out to a divorcing spouse, even though the accumulated benefits may be community property (in a community property state such as Texas). For this reason, the alternate payee is said to receive the benefits “if, as, and when” the retiree or employee receives the benefits. As a result, the QDRO will assign to an “alternate payee” (who is usually the divorcing spouse) the right to receive all or a portion of retirement plan benefits payable to a “participant” (or the employee). A QDRO can also sometimes be used to collect child support or spousal maintenance.
How do we divide any retirement accounts?
In Texas, retirement accounts, not unlike mutual funds and some stock accounts, are assets acquired over the course of many years. In dividing these assets during a Divorce, you must first determine the character of the retirement account – in other words, whether it is Community Property or Separate Property (or, perhaps, both – as explained below).
First, purchases or contributions that occurred prior to the marriage would be Separate Property. Next, purchases or contributions that occurred after marriage would be considered Community Property. (Actually, it is a little more complicated than this, when you add in the earnings, losses, dividends, and stock splits that occur in most retirement accounts, but the essential point is that such assets have a dual character.) Often, lawyers will hire financial experts to provide an opinion as to how much is owned by one spouse as separate property versus how much is jointly owned as community property, and therefore subject to division with the other spouse.
Also, retirement accounts (like 401k’s) are not usually divided under the Divorce Decree like other assets. This is true because there is often an administrator that is responsible for managing the retirement account. Under federal law, which Texas judges must follow, the Court will not be able to simply order the administrator to liquidate the account and pay it in cash to the respective spouses. Instead, federal law allows the state Court to issue a Qualified Domestic Relations Order (also simply known as a “QDRO” – pronounced for short “Quad Row”). The QDRO will set out how the account is to be divided. Ordinarily, the retirement account administrator will create another account in the amount (usually designated in either a total dollar amount or a percentage of the account as of a date certain) to be paid to the other spouse as specified in the QDRO. When the QDRO divides the account into two accounts, both spouses will be subject to the rules governing the retirement account (sometimes called the retirement “Plan”). Depending upon the Plan, disbursements for particular reasons may be allowed or loans may be allowed. You will need to check with the retirement account administrator to find out the rules relating to the Plan.
Post-Divorce Planning with Insurance and Retirement Benefits
Oftentimes divorce attorneys are focused on getting all of the divorce issues handled and do not discuss estate planning issues with you. At the inception of any Divorce, it is recommended that you seek the advice of an experienced Estate Planning Attorney to update your will, living will, medical powers of attorney, and durable powers of attorney. Although Texas law provides that after a Divorce, beneficiary designations as to insurance proceeds and retirement benefits are treated as having been automatically revoked under Texas Family Code sections 9.301 and 9.302, you should not depend upon this. The insurance company or Plan Administrator will not be liable for paying in accordance with your instructions unless they get prior notice of the claim of another before distributing the funds and then fail to interplead the funds into the registry of the court. Also, you may not have considered some of these issues:
- What if a spouse should die during the pendency of the Divorce, will my spouse get all of my life insurance and retirement benefits?
- What happens after we have settled our case (by mediation, negotiation, in a Rule 11 Agreement, or otherwise), but before the divorce is actually finalized?
- Do you want your spouse making medical decisions if you should get seriously injured?
- Do you want your spouse to have access to all of your assets, bank accounts, safe deposit box, and mutual funds in the event of your incapacity?
You should also be aware that once the Divorce case has been filed, you may not be permitted to change these designations due to a Temporary Restraining Order, Temporary Injunction, Local Rule, or as we have in Austin, Texas, the TRAVIS COUNTY STANDING ORDER REGARDING CHILDREN, PROPERTY, AND CONDUCT OF THE PARTIES. As a result, you need to make these considerations prior to the time the Divorce is filed.
This is where divorce law intersects with estate planning and probate law. Anyone who may be planning on divorce should think about these issues and consult their Divorce Attorney to come up with a plan to ensure that these matters are addressed.
There Must Be a QDRO to Divide Retirement
Kennedy v. Plan Administrator is a case in point. Mr. Kennedy was a DuPont employee who participated in DuPont’s retirement plan. After Mr. Kennedy married, he designated his wife as the beneficiary of his retirement plan in the event that he died before she did. Later, the couple divorced. In the divorce decree, Ms. Kennedy agreed that she would be divested of “all right, title, interest, and claim in and to . . . the proceeds therefrom, and any other rights related to any . . . retirement plan, pension plan, or like benefit program existing by reason of [Mr. Kennedy’s] employment.” On its face, this language divested Ms. Kennedy of any interest in Mr. Kennedy’s DuPont retirement plan.
But no QDRO was signed. Mr. Kennedy retired from DuPont. Later, he died. The retirement plan paid the balance of Mr. Kennedy’s retirement – approximately $400,000 – to the former Ms. Kennedy because, it said, the waiver in the divorce decree did not comply with ERISA.
Mr. Kennedy’s estate sued Mr. Kennedy’s ex-wife to recover this $400,000. The trial court ruled for the estate, but the estate lost on appeal to the United States Court of Appeals for the Fifth Circuit. Quoting a United States Supreme Court case, the court held that Congress had enacted strict and detailed rules governing how beneficiaries of pensions can be changed. Mr. Kennedy had failed to follow those rules, so his ex-wife received his retirement after he died.