QDROs usually come into play with either a defined benefit plan or a defined contribution plan.
- Defined benefit plan — A defined benefit plan, by definition, usually provides for lump sum payment to the participant. The plan usually uses an actuarial formula which addresses such factors as expected salary, remaining work life, expected life of the participant and the expected rate of return on the assets within the plan to determine the amount and timing of any benefits to be paid to the participants, including alternate payees.In context to a divorce (during or after it is settled) the impacted parties need to agree on the amount and timing of any payouts. It is important to note, employers have to ensure there are enough funds to pay future retirement benefits. Said differently, the employer has to take on the risk to always ensure the defined benefit plan is adequately funded. Defined contribution plans operate differently.
- Defined contribution plan — A defined contribution plan establishes a separate account for each participant whereby the employer agrees to set aside a specific amount for each participant. The participant has a right to also contribute to the fund. Sensitive issues arise when there are contributions to the fund such as:
- Were the contributions made from marital property?
- When were the contributions made?
- Are there any gains or losses attributable to these contributions?
Under a defined contribution plan, the risk of payment shifts from the employer to the participant and alternate payees. In other words, if the participant withdraws a certain amount of money during her or his life from the plan and leaves herself or himself with little left over to fund future years the risk of having enough funds is on the participant not the employer.
Defined benefit plans are commonly represented by traditional pension plans provided by companies. Defined contribution plans can include different types of retirement plans such as 401(k) plans, 403(b) plans and employee stock ownership plans (ESOPs). It is important to note a QDRO cannot be used as a vehicle to split an IRA between divorcing parties as there is no plan administrator of an IRA. Traditionally, the QDRO is submitted to a plan administrator to enable a re-distribution or re-allocation of the plan’s benefits. In other words, the alternate payee will become a participant in some form or another if approved by the plan administrator. With an IRA there is no plan administrator and therefore a QDRO does not apply to IRAs.
Defined contribution plans can payout lump sum benefits to alternate payees. Some defined contribution plans provide for a stream of payments over the payee’s lifetime after retirement. This difference in payment streams impacts how a divorce is settled.
About the Author
Larry Smith is a Founding Partner of Divorce Outcomes, a specialized professional services firm that manages all of the financial aspects in a divorce process. Since 2003 he has worked as a trusted financial advisor, financial advocate, divorce architect and technical financial expert; he is not an attorney. He is an alumni of KPMG and Andersen with expertise in technical accounting, forensics, sophisticated taxation, management consulting, risk management, advanced process engineering, business combinations, divorce management, multi-party negotiations, advanced quality analytics and cognitive performance technologies. Since 1986 Larry has been advising individuals and organizations about innovative financial solutions to resolve complex financial challenges that arise in life and in business.
For both personal and business divorces, Larry is considered an expert in divorce strategies, divorce process management, financial divorce architecture, financial risk management, taxation for divorces, financial divorce forensics, advanced divorce analytics, financial divorce negotiations and mediation, business valuations and sophisticated equity structures. He helps clients shape complex financial decisions, manage communication risks and ever-changing negotiating positions to strategically preserve or grow wealth from these types of transactions.
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About Divorce Outcomes
Divorce Outcomes is a specialty services firm that helps people both domestically and internationally manage all of the financial decisions that arise in their divorce process. We are not attorneys. We are financial experts who partner with our clients as their personal financial advocates. We help our clients manage their divorce process, uncover hidden financial risks, architect divorce solutions, manage ever-changing negotiating positions, communicate complex financial matters and close the divorce process as soon as possible with a goal to arrive at the best outcomes possible. Throughout the process we evaluate the current state of our clients’ financial lives with an objective to best reposition their future. We do not sell any products. We simply raise issues that are in our clients best interest. Our clients share with us we:
- unfold, analyze and repackage their financial life so they are well positioned after their divorce
- preserve the value of their business or marital estate
- continuously strive to provide a return on our services
- build balanced financial solutions grounded in evidence
- find ways to make our client, and at times both parties, money through the process
- design their divorce to work for them and their family’s life
- provide mental clarity to make decisions
- reduce the total process time from start to close
- minimize the stress and unpleasant memories that can last a lifetime
As we reach an agreed upon settlement structure, we help our clients identify a fitting attorney who can leverage the financial solution to draft and record the requisite legal documents. Where outcomes are at risk from a traditional process, we function as expert financial negotiators or financial mediators to turn around the situation and achieve our client’s desired outcomes.
This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute formal advice or a recommended course of action as every person’s situation is unique and different. The information here is not intended to be, and should not be, relied upon by the recipient to make a decision without professional guidance.