Josh2.ashxWe frequently receive calls from divorce litigants who were supposed to receive a portion of their spouse’s retirement as part of their property division. However, when these litigants send their final judgment to the plan they are told that retirement assets (401k plans, pensions, etc.) are governed by federal law and therefore a state-court divorce order is ineffective. You can imagine the consternation that this information causes, particularly since retirement plans are often the largest asset divided in divorce.

Thankfully, we are able to tell these litigants that all is not lost and that, with a relatively inexpensive legal tool we ensure that their money is safely transferred into their possession. This tool is called a Qualified Domestic Relations Order, or more commonly a QDRO.

In 1974, the Congress enacted the Employee Retirement Income Security Act (ERISA) in order to regulate the benefits that employee’s received as part of their compensation packages. Among other things, ERISA provides that qualified retirement assets are inalienable and exempt from seizure. This means that a participant cannot gift, pledge or sell his interest in a retirement asset nor can he or she have it seized by a creditor to pay debt.

However, at the same time that Congress was passing ERISA in order to prevent the seizure of retirement funds; several of the states were creating equitable distribution laws which effectively did just that. These laws typically held that a retirement asset was a marital asset subject to distribution as part of the property division in a divorce. Thus, a conflict arose between the federal government’s attempts to exempt retirement assets and the state governments’ decision to create an exception to this exemption.

The resolution of this conflict was borne out in the Retirement Equity Act of 1984. This act created a new type of order called a Qualified Domestic Relations Order and held, among other things, that retirement assets could be divided in divorce on the condition that the form of the order was approved by the individual retirement plan.

In effect, this means that in order to be qualified (and in order for the funds to be transferred) a QDRO must conform to: (a.) the terms of the Final Judgment; (b.) state law; (c.) federal law including regulations from both the Department of Labor and the IRS; and (d.) the specific provisions of the retirement plan in question.

Once this QDRO is entered by the Court, and approved by the retirement plan, the non-employee spouse can be assured that they will receive the retirement benefits that their divorce decree provides.