Divorce can mean months, or even years, of hammering out settlement terms. The process can be both exhaustive and exhausting; but, in the end, you and your ex will have a formal agreement. Once it’s signed by both parties and filed with the court, your divorce will be official, and in an ideal world, each party will honor the terms of the settlement . . . and life will go on accordingly.
However, if you’re negotiating an agreement that will include spousal and/or child support, there’s something critically important you need to know: Many ex-husbands don’t honor the financial terms of their divorce settlements. U.S. Census data show the sad truth: less than half of parents get the full amount of child support. And through my experience as a Divorce Financial Strategist™, I can tell you that alimony, too, is often difficult to collect. Divorce attorneys see it time and again, and they have file cabinets full of paperwork from trying to chase down delinquent payments for their clients.
Fortunately, there’s a tool that’s becoming increasingly popular and effective against this troublesome problem: the Qualified Domestic Relations Order (QDRO).
What is a QDRO?
A QDRO is a court order concerning retirement plan benefits, and it can be used to enforce spousal support, or even for collection of past due support payments. Simply put, it allows for an alternate payee to receive some or all of the benefits payable to a participant in a retirement plan. Note: Applicable retirement plans include pension plans, 401Ks, 403Bs and other Employee Retirement Income Security Act (ERISA)-governed plans . . . but not IRAs.
So, a judge can use a QDRO to ensure equitable division of a spouse’s retirement plan benefits as part of a settlement. In other words, a judge can use a QDRO to order that you receive part of your husband’s retirement benefits, and because federal law allows a retirement plan to be used as a source of funds for child support and alimony, QDROs can also be used to enforce spousal support, or even for collection of past due support payments.
It Can Secure Temporary Support and Collateralize Alimony and Other Payments
While your case is pending, a judge may order that your husband provide temporary support payments so that you: 1) have enough money to support yourself and your children and 2) can retain a professional divorce team. This can be accomplished through an interim award of Equitable Distribution via QDRO.
In addition, to collateralize support payments after your divorce, a QDRO can function essentially as a lien on your husband’s (non-IRA) retirement accounts. These accounts may have already been divided as part of your settlement agreement, with part going to you, and part staying “as is,” with your ex-husband. But your settlement can also include a provision that if your husband does not meet his financial obligations as specified in the agreement, that money will be taken via QDRO from his portion of the retirement plan, and paid directly to you.
Thus, the QDRO gives you a security interest — a “lien” — in the portion of your husband’s retirement plan funds that has not already been allocated to you as part of your settlement.
If Your Ex is Already in Arrears With Payments, a QDRO Might Help You Recover Them
If your ex never makes the payments he’s agreed to, or if the checks aren’t what they’re supposed to be or stop coming altogether, it can be extremely difficult to recover what you are owed. Fortunately, a QDRO can help. A judge can order that delinquent payments be made directly from an eligible retirement plan.
Don’t assume this is a simple process, though. Retirement plans themselves have complicated rules and provisions, and each one is different. For instance, many plans are restricted from making lump sum payments such as would be ordered to recover arrearages in spousal and/or child support. Instead, such plans might allow only for periodic distributions of funds.
If an immediate payment out of your ex’s retirement plan is not possible, then the amount of future payments a judge could order would have to be carefully calculated to be sure you ultimately receive all that you are owed.
A QDRO Can Be Used to Collect Attorney’s Fees From Your Spouse
Please don’t misunderstand: A QDRO does not represent free access to your ex’s retirement plan for just any reason. ERISA, for instance, sets forth specific purposes for which retirement plan funds can be used, and the whole point is to enable people to save for retirement, thus avoiding financial difficulties in later life. If retirement plans were accessible for anything, they wouldn’t be fulfilling that purpose. Accordingly, ERISA specifies that QDROs must relate to support or property division.
Why, then, could they be used to collect attorney’s fees? Because many courts now recognize that it is fair to characterize attorney’s fees as support. Without an attorney, you would not be able to proceed with your divorce on equal footing with your husband.
While we’re discussing legal costs, it’s worth noting that drafting a QDRO requires highly qualified expertise. To get it absolutely right, your attorney is likely to outsource the detailed work to a specialist. Make sure the legal cost of drafting and reviewing the QDRO is itself addressed in the QDRO.
And Don’t Forget Taxes
As with all things financial, using a retirement asset to secure or recover support payments in divorce carries certain tax implications. You should absolutely consult with your attorney and a certified divorce financial planner to analyze all the angles to your specific tax situation. In the meantime, I can say that, generally speaking, there is no penalty attached to an alternate payee’s distribution of retirement benefits under a QDRO and, if you transfer the funds directly into an IRA, you may be able to avoid the withholding tax.
With no undue tax liability incurred, and if legal costs and complications are well-managed, a QDRO could be exactly the mechanism you need to ensure you actually receive the support payments your ex is legally obligated to provide.
Keep in mind that it is always best to think financially not emotionally (as I write about in my book). Your husband may show every sign of honoring his post-divorce financial obligations to you, but as many divorced women would tell you, even the best intentions can change over time. If you are negotiating a divorce settlement, including a QDRO to collateralize support payments is better than having to draft one later to recover funds you’re owed.
Jeffrey Landers is a member of the DailyWorth Connect program. Read more about the program here.