What is a QDRO?

In Minnesota divorce proceedings, the term “QDRO” is short for “Qualified Domestic Relations Order.”  A Qualified Domestic Relations Order is a court order that divides qualified retirement assets between spouses, as part of the divorce process. Usually, a QDRO is entered as a separate order, after the divorce has been finalized by entry of the divorce Judgment and Decree.  However, QDRO language can be included as part of the divorce Judgment and Decree, though in Minnesota divorce practice this is rarely done.

Qualified retirement assets include 401(k) plans, 403(b) plans, and pensions.  These retirement assets can be divided as part of the property division.  No income taxes or penalties are paid because the division occurs in connection with a divorce.  Property transfers between spouses that occur as part of a divorce proceeding are non-taxable.  However, valuing and dividing retirement assets can be complex, and it is important that the QDRO be prepared by a competent, experienced attorney.

In essence, a QDRO is a court order that instructs the plan administrator to divide a retirement asset between former spouses in a particular way. In the case of a 401(k) plan or a 403(b) plan, the division takes place promptly after the receipt of the QDRO.  In the case of a pension, the monthly payment that commences upon retirement is divided between spouses according to a formula.  The formula factors the number of years of the marriage together with the total number of years of employment.  That way, the non-participating spouse receives only a portion of the marital component of the pension.

Not to get overly technical, but a “qualified” retirement asset is, by definition, one that is described in Section 401(a) of the Internal Revenue Code.  It is a company retirement plan that is established for the benefit of company employees, and typically the employer makes a contribution to the plan.  IRAs and Roth IRAs are individual retirement accounts, not qualified retirement assets, and they are not divided with a QDRO.

If you have any questions about QDROs, you should feel free to call attorney Daniel Fiskum at Minnetonka Family Law, P.A.  The telephone number is (952) 270-7700.  Minnetonka Family Law is conveniently located in the Carlson Towers, located at the intersection of Highway 494 and Highway 394 in Minnetonka, Minnesota.  Call now to schedule a meeting for a free divorce case analysis.

 

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MN Divorce and Retirement Assets

Recently I was asked whether re-marriage can affect a person’s entitlement to receive retirement assets that were divided pursuant to a Qualified Domestic Relations Order as part of a divorce decree.  The answer is “No.”

Here’s the background: in Minnesota, assets acquired during a marriage generally are considered “marital” property.  Exceptions include inheritances, gifts made individually to one spouse and not to the other, and some components of personal injury settlements.  There are a few other exeptions.

In Minnesota, marital assets, including retirement assets are subject to an equitable division.  This includes retirement assets, including pension plans, 401(k) plans, IRAs, Roth IRAs, and other types of assets.

Generally speaking, IRAs and Roth IRAs can be divided rather simply, with a roll-over from one account to another account (in the name of the spouse receiving the asset).  Because of the way the internal revenue code is structured, pension plans and 401(k) plans require a more detailed treatment.  I believe this is because pension plans and 401(k) plans involve pooled assets.

To divide a 401(k) plan or a pension plan, the court needs to enter something that in Minnesota is called a “Qualified Domestic Relations Order.”  To put it simply, this is an order from the court to the plan administrator, telling the plan administrator to take a particular action, that is, to transfer all or part of an asset from one spouse’s name into the other spouse’s name.  (Keep in mind that this is an oversimplification, its a little more complex than this in real life.)

In Minnesota, the abbreviation for Qualified Domestic Relations Order is “QDRO.”  Once a QDRO has been entered by the court, it is served on the plan administrator.  The plan administrator then follows the directive of the recipient in either establishing a new account or transferring the assets.

Once the QDRO is approved by the court, it is final.  If a spouse receiving an interest in a pension plan or 401(k) remarries, he or she does not lose the benefit of the retirement asset that was transferred to him or her by a QDRO.  The property division became final at the time of the divorce.

 

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Minnesota Government Shutdown

Like most Minnesotans, whether Republican or Democrat, I do not like to see our state government shut down.  I hope our elected representatives do what needs to be done to get our state open for business again.

The Minnesota court system will remain open for now.  It is possible that some services might be curtailed, but not during the month of July.

I believe that in the future, the courts will either provide fewer services to people who are getting divorced, or they will charge more for the service.  Presently, many courts have an “in-house” service that helps people resolve custody and parenting time disputes.  In some counties, this is called the “Custody Early Neutral Evaluation” program.  In other counties, it is called the “Social Early Neutral Evaluation” program.  Generally speaking, I think it is a good thing and most of the time my cases that go through the CENE or SENE program are settled.

Currently, many counties offer the CENE or SENE program at a very reduced rate to people who have financial limitations.  And, they offer it at a very reasonable rate to everyone else.  It’s possible that this could be one of the casualties of the financial straits our government is in.  I don’t think the CENE program will go away because its too important to the system.  But, I do think it will begin to cost more.

What a lot of people forget is that when taxes are kept low, fees for governmental services go up.  Right now, in most counties, the filing fee for a divorce case is $400.  (In Hennepin its $402.)  I expect that fee to increase.  The fee for sending a fax to the court is $25.  The fee for filing a formal motion is $100.  The person who is getting divorced pays these fees.

Feel free to call me at (952) 270-7700 if you have any questions or concerns about Minneosta divorce law and the Minnesota state government shutdown.

Minnesota Divorce and Retirement Assets

Often people ask me about how to divide retirement assets when they get divorced.  As I’ve mentioned before, Minnesota is a marital property (or common law) divorce state.  It is not a community property divorce state.  (Most states are community property states.  Minnesota is not.) 

In Minnesota, a division of assets is supposed to be “equitable,” not “equal.”  These two concepts are not the same.  The reason this is important for you to know is that, depending upon the skill of the divorce lawyers, there can be a lot of “slop” when people get divorced.  Sometimes valuation dates get messed up, sometimes values are incorrectly determined, sometimes values change dramatically during the divorce process.  The result can be a property division that is not particularly “equal.”  But, it could be “equitable.” 

In Minnesota, a court can take up to one-half of a spouse’s non-marital property and award it to the other spouse.  Yep, you heard it correctly.  A Minnesota divorce court can take up to one-half of the property you had before you were married and award it to your spouse.  This does not happen very often, but it does happen. 

So, what about retirement assets?  There are several kinds of retirement assets–IRAs, Roth IRAs, 401(k) plans, and pension plans, to name a few.  IRAs and Roth IRAs can be divided by means of a direct rollover.  Essentially, the divorce decree describes the IRA to be divided and states how it is divided–that is, how much each spouse receives.  One spouse or the other takes the decree to the bank and the bank rolls a specific dollar amount into a new account for one of the spouses.  Its a pretty straight forward process.

401(k) plans and pension plans are not as easy to divide.  They require something called a “Qualified Domestic Relations Order” known as a “QDRO” for short.  A QDRO is a court order that conforms to requirements of federal law (mostly ERISA) that directs a plan administrator to take a particular action–in this case, to take some money from a 401(k) plan, for example, and give it to the non-participating spouse.  The end result is the same as with an IRA–the non-participating spouse gets some cash in his or her own account.  But, its a lot more work.  The QDRO has to be correclty worded and it has to meet with the approval of the plan administrator.  The reason for this is that if a distribution is made improperly, the qualified tax status of the entire plan can be jeopardized.  Depending upon the size of the plan and the number of participants, a mistake like this could be catastrophic for the plan administrator.  So, the QDRO has to be correctly written. 

It can be a bit more tricky to divide a pension.  One reason for this is that many pensions have an indeterminate payout.  In other words, you know that when you retire, you’ll get a certain monthly payment.  But, you do not know how much that monthly payment will be until you actually retire.  Its going to depend upon how much money is in the retirement plan and how many retirees are sharing it. 

So, in that case, a QDRO is written that describes a fraction.  Without getting too technical, basically the non-participating spouse receives one-half of the monthly payment that is attributable to the years of marriage.  The participating spouse receives one-half of the monthly payment that is attributable to the years of marriage, plus all of the monthly payment that is attributable to the post-marriage years.  This is expressed by a mathematical equation that takes into account the years of marriage and the total number of years of participation in the plan.

There is also something called a survivor annuity.  You need to research this by getting complete information from the plan administrator.  Many plans have something similar to an “insurance policy” that allows for continued payments to a non-participating spouse when the participating spouse has died.  Often, when one takes advantage of this, the monthly payments upon retirement are somewhat less.  Also, many plans have a provision that when the non-participating spouse dies, the participating spouse’s monthly payment is increased to the amount that it would have been had an award not been made to the former spouse.  Check this out, and when writing the QDRO, do not leave money on the table.

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