It’s commonplace for divorcing couples to use a Qualified Domestic Relations Order (a “QDRO”) to divide retirement plan benefits when the spouses are dividing assets. However, it’s less known that a QDRO can be used to collect child or spousal support or arrearages of child support when the support oblige is the plan participant in an employer retirement plan. Under Internal Revenue Code §414(p), the term ‘‘domestic relations order’’ means any judgment, decree, or order (including approval of a property settlement agreement) which— (i) relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of a participant, and (ii) is made pursuant to a State domestic relations law.
Some parents avoid paying child support and garnishing wages can be difficult when the parent quits his/her job, moves around, barters, or minimizes their income by working partly for cash. A retirement plan at that parent’s current or former employer could be a source to collect these arrearages. First a judgment would have to be entered awarding the child or spousal support arrearages or a record of the amount owed in back child support can be obtained by contacting the state’s child support enforcement agency.
Sometimes a parent is not trying to dodge child support but lacks funds. The parent can use a QDRO to request that payments of current child support be made from his retirement plan as opposed to his/her wages, thereby freeing more current income for daily living expenses.
A 401(k) plan is simpler to collect from through a QDRO. A pension plan is more complicated and it may be that payments under a QDRO cannot begin until the plan participant’s early or normal retirement age and so collecting arrearages in this way may take place long after the support is needed.
In the case of child support, either the child or the custodial parent can be named the “alternate payee” and care should be taken to be sure the plan participant parent bears the tax responsibility. If the plan administrator is required by federal law to withhold a percentage for taxes, the amount asked for in the QDRO needs to be grossed up to account for this withholding. Also, attorney fees to collect the arrearages, QDRO preparation fees and interest on back support should be addressed in the judgment and the QDRO.
The Right Divorce Solution can facilitate the preparation of QDROs. Contact us if you need one prepared.