Retirement accounts like pensions, 401ks, ESOPs and other employer-sponsored retirement plans are often divided in a divorce. The property award goes into the divorce decree or incorporates into the decree through a settlement agreement. That is not the end of the process to divide those retirement accounts in a Texas divorce. A separate order orders the plan administrator to segregate the benefit for the other spouse. (Called the alternate payee.) This order is called a domestic relations order. For retirement plans subject to ERISA, these orders must be qualified by the plan administrator before segregation. The orders are then qualified domestic relations orders, or QDROs.
QDROs in Texas
The DRO or QDRO is a critical step in protecting the alternate payee’s property award. Without a DRO, or QDRO, the alternate payee cannot obtain his or her benefit directly from the plan. Then the alternate payee relies on the participant to voluntarily turn over the alternate payee’s share. As you can imagine, after a bitter divorce the plan participant may not want to help the alternate payee. So that can create real problems. The DRO or QDRO ensures the alternate payee receives his or her share before the participant can liquidate the account. Assuming the court signs a DRO or QDRO immediately after signing the divorce decree. Ideally in most cases you want the QDRO available from the divorce lawyers at the time the divorce is granted.
So what happens if there is no domestic relations order?
The first issue is that the participant can take his or her benefit from the plan. (Assuming the plan rules permit him or her to do so.) If that occurs then the alternate payee will have to hash out payment from the plan participant, which often means more litigation to try to get money that may no longer exist. The plan participant may not have other assets to finance a judgment on the QDRO amount, leaving the alternate payee empty handed. That is particularly risky when the plan participant is a retiree who no longer has a regular income stream and may have used the funds from the retirement account to finance health care or pay off a mortgage on a home that is not subject to judgment liens.
An additional problem may exist in a pension and the participant has taken his or her benefit before the plan receives a DRO. Depending on the plan and the way the benefit was divided in the divorce, the alternate payee may lose some or all of her benefit when the participant initiated payment from the plan through the quirky and complex relationship between ERISA and state family law. If that happens then the alternate payee may have no opportunity to even litigate to restore his or her expected benefit. These are among the reasons why you should hire divorce lawyers skilled at drafting these orders.
What happens without a QDRO in Texas
Let me be clear here: this is not an all-or-nothing race to get the money out of the plan. A huge misconception exists all over the internet and society at-large that once the participant takes out his or her money the alternate payee gets nothing. That is not the case. The property award in the divorce decree exists regardless of whether the money resides. It is in those rare situations when the property award is defeated by ERISA as explained in the paragraph above.
In most situations with a monthly pension benefit, the monthly payment will be adjusted to reflect a later-submitted QDRO although the late submission may cut off some of what the alternate payee should have received. If the plan issued a lump sum payment then the participant has little defense against leaving the alternate payee empty handed. The alternate payee can file suit to enforce the property division. The judge can order the participant to repay the alternate payee his or her share (possibly plus attorney fees and definitely plus interest). There are some defenses to this kind of litigation but they are highly technical and rarely apply.
The alternate payee will almost always find himself or herself spending needlessly large sums of money trying to get paid out his or her share of the retirement account when it could have been resolved much sooner and much cheaper with a DRO or QDRO. Even if the alternate payee ultimately succeeds, he or she may experience financial hardships along the way. And of course there is no guarantee the alternate payee will prevail. It is unnecessarily risky to wait to move on the DRO/QDRO.