Dividing retirement and pension at the time of divorce can be a complex issue. The family court may allow the person who has the pension to retain the full pension, and offset other marital assets against it. Instead, the court may distribute a portion from each pension payment to the plan participant and an alternate payee by utilizing a Qualified Domestic Relations Order (QDRO).
A QDRO allows a retirement plan administrator to make payments directly to the spouse instead of having payments be made to the retiring spouse. Typically, pension plans restrict payments to one person with no option for assignment or alienation, and tax consequences attach to payments made to anyone other than the person who earned the pension. However, QDROs permit this exception because pensions are martial property subject to division upon divorce.
A court order must be qualified or approved by the plan or plan administrator before it is a QDRO. Best practice is to consult an attorney competent in drafting QDROs as the IRS requires specific information for recognition by a plan administrators and effective transfer. Consulting a CPA with experience in the area of private retirement funds can also ensure plan approval.
Approval of a QDRO can take a long time. The retirement plan must establish reasonable procedures to determine a QDROs qualification and administration of distribution. Upon receipt of a proposed QDRO the plan must notify the participant and payee of their procedures and the determination of whether the order is indeed a QDRO.
Be careful to ensure the QDRO addresses any other benefit entitlements beyond the payment of cash such as qualified joint and survivor annuity benefit or qualified pre-retirement survivor annuity.
Normally, a QDRO is used for non-governmental retirement plans. South Carolina State retirement pensions require a QDRO by state statute, yet the Federal Employee Retirement System is not subject to QDRO rules. Military retirement benefits are not pension plans and require specific language in a family court order to effective provide payments to a former spouse.
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