A “qualified” retirement plan provides favorable tax treatment under the Internal Revenue Code for the employer and employee. For example, the employer can deduct any contributions it makes to the plan and the employee does not pay tax on the contributions he or she makes. Additionally, the investment gains are tax-deferred until the benefits are withdrawn.
In a divorce the retirement benefits of each spouse are divisible property. The money that created the retirement benefit comes from the earnings and effort of one of the spouses during the marriage and therefore is community property that should be divided.
The problem is that in order for a retirement plan to be “qualified” it has to comply with the Employment Retirement Income Security Act (ERISA). ERISA prohibits an employee from assigning or transferring his or her benefits to someone else. This provision was to protect participants in a retirement plan from wasting their benefits and to protect the benefits from being seized by creditors.
If the spouses agree, or a court orders, that a portion of a retirement plan be awarded to one of the spouses then a Qualified Domestic Relations Order (QDRO) is used to make that division. A QDRO is an order from the court that:
- relates to the marital property rights of a spouse
- is made under the community property law in Texas
- contains certain statutorily required information
- meets requirements of the retirement plan
This is the Order that is used to assign a portion of the benefits to the former spouse as an alternate payee and still comply as a “qualified” retirement plan under ERISA and still receive favorable tax treatment under the Internal Revenue Code. An experienced family law attorney can assist you with a drafting and qualifying a QDRO. Then the retirement plan administrator will pay that portion assigned to the spouse according the provisions of the plan.