QDRO Confusion
My divorce clients are often confused by the terminology and procedures we use in dividing retirement benefits in Texas. I prefer to explain things rather than simply say "this is the way we do it," but a full explanation often takes more time than the client wants. So, this is the 5-minute answer to the question "how do we divide that retirement account?"
Texas is a community property state, mostly because land rights (before the USA came along) were governed by the Spanish customs and laws, which tried to make sure that a rich señorita who got married and was divorced would still have the land she inherited from daddy. The law was really quite progressive for its time. English common law theory eventually got to pretty much the same place, but by way of a different legal theory.
Money a husband makes during a marriage in Texas is community property, and if he puts it into a retirement account, and then the parties divorce, the wife has an ownership interest in that retirement account.
There are all kinds of retirement accounts and systems. Each retirement system recognizes that folks get divorced and retirement plans need to be divided up because of it. But many of these plans are governed by federal law. Under the concept of Federalism in the US Constitution (as clarified by the war between the states), states cannot control the federal government. By extension, state divorce courts have no direct power over federal retirement systems. Accordingly, the regulations for each type of retirement account have provisions for allowing a state divorce court to control what happens to a federal government regulated retirement account.
The type of retirement account I see most often in my divorce practice is a 401(k) plan. "401(k)" refers to the section of the law which created this particular type of retirement account, the Employee Retirement Income Security Act of 1974 ("ERISA"). The ERISA legislation refers to an order from a divorce court to divide retirement benefits as a "domestic relations order," and if the order meets the criteria within ERISA, it becomes a Qualified Domestic Relations Order, abbreviated as QDRO and typically pronounced KWAD-ro.
Most (not all) retirement systems need a court order to divide retirement benefits, but it's only called a QDRO when it's a plan governed by ERISA, including 401(k)s, 403(b)'s, and many pension funds. For other systems (such as retirement systems for government employees), the document may look exactly like a QDRO, but it'll have a different name, and I tend to call them QDRO-like-things.
A notable exception is the IRA, whether it's a traditional IRA, Roth IRA, or something else. These are not governed by ERISA, but they don't need a separate court order, either. We just spell out in the Final Decree of Divorce that a particular IRA is to be divided or reassigned (giving the spouse a portion or all of the account). Remember that the "I" in "IRA" stands for individual, so there's no such thing as a Joint IRA.
If you divide a retirement account properly, it does not trigger taxes and penalties. The spouse's share of the retirement account will usually be moved into an IRA in the spouse's name. For a pension, a separate pension account will usually be created for the spouse.
I don't do QDROs or QDRO-like-things, because they're quite specialized. I have another attorney do these for me, and right now the first order she prepares costs either $350 or $400, and if more than one is required, the additional ones are usually $100 each. However, I do coordinate and communicate with the QDRO lawyer.
For more information on this sort of stuff, please click here to visit my web site.
Hal Davis
Texas is a community property state, mostly because land rights (before the USA came along) were governed by the Spanish customs and laws, which tried to make sure that a rich señorita who got married and was divorced would still have the land she inherited from daddy. The law was really quite progressive for its time. English common law theory eventually got to pretty much the same place, but by way of a different legal theory.
Money a husband makes during a marriage in Texas is community property, and if he puts it into a retirement account, and then the parties divorce, the wife has an ownership interest in that retirement account.
There are all kinds of retirement accounts and systems. Each retirement system recognizes that folks get divorced and retirement plans need to be divided up because of it. But many of these plans are governed by federal law. Under the concept of Federalism in the US Constitution (as clarified by the war between the states), states cannot control the federal government. By extension, state divorce courts have no direct power over federal retirement systems. Accordingly, the regulations for each type of retirement account have provisions for allowing a state divorce court to control what happens to a federal government regulated retirement account.
The type of retirement account I see most often in my divorce practice is a 401(k) plan. "401(k)" refers to the section of the law which created this particular type of retirement account, the Employee Retirement Income Security Act of 1974 ("ERISA"). The ERISA legislation refers to an order from a divorce court to divide retirement benefits as a "domestic relations order," and if the order meets the criteria within ERISA, it becomes a Qualified Domestic Relations Order, abbreviated as QDRO and typically pronounced KWAD-ro.
Most (not all) retirement systems need a court order to divide retirement benefits, but it's only called a QDRO when it's a plan governed by ERISA, including 401(k)s, 403(b)'s, and many pension funds. For other systems (such as retirement systems for government employees), the document may look exactly like a QDRO, but it'll have a different name, and I tend to call them QDRO-like-things.
A notable exception is the IRA, whether it's a traditional IRA, Roth IRA, or something else. These are not governed by ERISA, but they don't need a separate court order, either. We just spell out in the Final Decree of Divorce that a particular IRA is to be divided or reassigned (giving the spouse a portion or all of the account). Remember that the "I" in "IRA" stands for individual, so there's no such thing as a Joint IRA.
If you divide a retirement account properly, it does not trigger taxes and penalties. The spouse's share of the retirement account will usually be moved into an IRA in the spouse's name. For a pension, a separate pension account will usually be created for the spouse.
I don't do QDROs or QDRO-like-things, because they're quite specialized. I have another attorney do these for me, and right now the first order she prepares costs either $350 or $400, and if more than one is required, the additional ones are usually $100 each. However, I do coordinate and communicate with the QDRO lawyer.
For more information on this sort of stuff, please click here to visit my web site.
Hal Davis
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