Protecting Retirement Benefits In Divorce

When parties divide qualified retirement plans during a divorce, it is common practice to enter a Qualified Domestic Relations Order (“QDRO”) to effectuate the division. A “qualified” plan is one that comports with the provisions set forth in Section 401(a) of the Tax Code. The most common plans are profit sharing 401(k) plans, pension plans, and defined benefit plans that are not taxed until you withdraw your money. Entry of a QDRO creates the existence of an alternate payee’s (e.g. ex-spouse) right to receive all or a portion of a retirement benefit and should be entered with the Court when one spouse is awarded an interest in the other spouse’s plan.

During the division of any qualified plan, the participating member (i.e. the plan owner), is also well-advised to carefully review his or her plan to ensure that his or her share is safeguarded from any additional allocations to the former spouse. Specifically, after the divorce, he or she should be sure to designate a new beneficiary or otherwise risk having his or her benefit being distributed to the former spouse. Without a change of beneficiary, or signed waiver from the other spouse, the former spouses risk being entangled in post-decree litigation when one of them passes.

This was the case in the United States Supreme Court case Kennedy v. Plan Adm’r for DuPont Sav. and Inv. Plan, 552 U.S. 1178 (2008). In Kennedy, a former spouse never changed his beneficiary designation in the plan documents after the divorce. When he died, his benefit was inherited by his former wife. The plan administrator, the Supreme Court held, had properly complied with the federal regulations which require the benefit be disbursed to the former wife. The wife’s waiver of the interest, that was set forth in divorce documents, was insufficient to disavow her interest.

The safest course of action in any allocation involving a qualified plan is to consult the plan administrator and determine the procedure for declining and/or changing beneficial interests. Critically, immediately after the divorce, the parties should follow the prescribed course of action.

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