Frequently Asked Questions
Yes. A current spouse qualifies as an alternate payee under ERISA and under the US Tax Code.
Both ERISA § 206(d)(3)(K); 29 USC § 1056(d)(3)(K) and U.S. Tax Code, 26 U.S.C. § 414(p)(8) define an “alternate payee” as follows:
The term “alternate payee” means any spouse, former spouse, child, or other dependent of a participant who is recognized by a domestic relations order as having a right to receive all, or a portion of, the benefits payable under a plan with respect to such participant. The QDRO provisions of ERISA and the U.S. Tax Code are strictly interpreted, meaning that only the clear meaning of the text can be considered. Thus, a receiving party must be a “spouse, former spouse, or …[dependent child].”
No. A domestic relations order that provides for child support or recognizes marital property rights may be a QDRO®, without regard to the existence of a divorce proceeding. Such an order, however, must be issued pursuant to state domestic relations law and create or recognize the rights of an individual who is an alternate payee (spouse, former spouse, child, or other dependent of a participant).”
According to the Department of Labor (DOL), the answer is NO. The Department of Labor is the federal entity that oversees and interprets ERISA. The DOL website includes a Frequently Asked Question section. Question 4 states the following:
“Must a domestic relations order be issued as part of a divorce proceeding to be a QDRO?”
No. A domestic relations order that provides for child support or recognizes marital property rights may be a QDRO, without regard to the existence of a divorce proceeding. Such an order, however, must be issued pursuant to state domestic relations law and create or recognize the rights of an individual who is an alternate payee (spouse, former spouse, child, or other dependent of a participant).”
No. The In Marriage QDRO® is designed solely for married couples. It provides the tools and the process to allow a husband or wife access to his or her spouse’s retirement benefits as authorized by ERISA. An In Marriage QDRO® cannot be used by an unmarried person to access his or her own retirement benefits.
Generally, no. As stated above, the In Marriage QDRO® was designed solely for married couples. However, we note that some – but certainly not all – states allow for a common law marriage. A common law marriage is one in which a couple is deemed to be married without a formal ceremony or marriage license if they live together for a specified period of time and hold themselves out to friends, family, and the community as “being married”. The rules regarding common law marriage vary per state. If long term partners meet the requirements for a common law marriage, then an In Marriage QDRO® can be utilized.
Yes. While marriage does allow you to use the In Marriage QDRO® to access your new spouse’s retirement, we do not recommend this as a basis for marriage.
Plans eligible for the In Marriage QDRO® strategy must be qualified plans under the federal ERISA statute. These plans include:
– State Deferred Compensation
– 457 Plans
– Corporate Pension Plans
– Some Profit Sharing Plans
Plans that are not eligible include military plans, federal & state pensions, IRAs, SEPs and non – qualified executive pension plans.
There are two complications that could occur in the future: Divorce and Death. ERISA allows a spouse to be an “alternate payee” to receive some or all of the plan participant’s retirement benefit. According to ERISA and the Department of Labor, the spouse’s rights as an “alternate payee” must be established by an agreement under their state domestic relations law. In other words, the spouses must enter into an agreement or contract that sets forth his or her rights to the retirement benefits. We refer to this as an Inter-Spousal Agreement. The types of Inter-Spousal Agreements vary by state. The Inter-Spousal Agreement is an enforceable agreement that affects marital property rights. It is not a simulated transaction that can be ignored after the transfer is complete. If the parties were to divorce in the future, each party would be required to live with the consequences of what was signed. The consequences are different for each state. The death of either party may also cause complications depending on the succession and probate laws of that particular state. Specifically, if the retirement funds are moved into a financial account or investment tool requiring a beneficiary designation, the receiving spouse has the unilateral right to designate any beneficiary to the newly formed account.
No. It is not an In-Service Distribution (also known as an In-Service Rollover). An In-Service Distribution is when an employee is allowed access to his or her retirement plan while he/she is still employed with the company. It is only allowed in select companies and has rules and regulations as to what amount and which funds can be distributed. To discourage employees from seeking an In-Service Distribution, many companies will impose a penalty period during which time the employee may not contribute to or receive matching for his or her retirement after an In-Service Distribution is made. Additionally, if the employee is under 59 ½, the early withdrawal 10% penalty is applicable. The In Marriage QDRO® is not an In-Service Distribution. It does not require the approval of the company. It is based solely on federal statutes and its interweaving with state domestic relations law. Additionally, an In Marriage QDRO® in many situations may provide a better method of liquidation if cash is what the parties are after because it is not subject to the 10% early withdrawal penalty for persons under 59 ½. Lastly, an In Marriage QDRO® results in no suspension of contributions or plan participation.
Couples seek to use In Marriage QDRO® for a variety of reasons. Some of the most popular reasons include access to funds for alternate investment strategies, such as the purchase of rental properties and the delay of required minimum distribution. Many couples simply wish to access their retirement to allow their personal financial advisor to oversee their investments. Another popular reason for seeking an In Marriage QDRO® is to allow for the financing of educational expenses without the expense of a long term student loan.
The standard rollover involved in an In Marriage QDRO® from a 401(k) or other qualified plans to the Alternate Payee’s IRA or other pretax plan is not subject to any income tax because it is a non-taxable transaction. There is an option during this process wherein the Alternate Payee can liquidate a portion or all of the funds. Such a liquidation would constitute a taxable transaction so it would be advisable to work with a financial advisor or CPA to determine if any of the funds should be liquidated. However, an Alternate Payee liquidation is NOT subject to the 10% early withdrawal penalty even if the Alternate Payee is under 59 ½ years old.
Although the utilization of a financial advisor is not required in the In Marriage QDRO® process, it is strongly encouraged. Whether a taxable consequence occurs will depend on how the accessed retirement funds are invested. A financial advisor will be able to assist you through that process as part of an overall financial and tax plan.
Since it is a federal statute, it technically is applicable in every state. However, research and experience have revealed that there are some states that have laws which restrict the ability of married spouses to enter into certain types of agreements. Although it may still be possible to perform an In Marriage QDRO® in these states, our company has made the decision to forego pursuing cases in these states until further research and verification of the process can be made.