QDROsâA Powerful Tool for Child Support Enforcement
If you are like most attorneys who practice family law, you have file cabinets filled with uncollected child support arrearage judgments. Each one of those judgments represents an unhappy or dissatisfied client and an indeterminable loss of income, not to mention hours of court hearings and frustration. Attempts to garnish wages or banks accounts are many times a futile exercise in frustration for you and your client. The efforts usually result in a sentence of jail time for the offending spouse. This is not a desirable result as the payment of arrearages of support during incarceration is nonexistent and your client is still owed the monies.
In addition, today many jurisdictions require court-ordered mediation in postdissolution proceedings that only result in additional fees to your client and more unbillable hours to your ledger. Most family practitioners have used qualified domestic relations orders (QDRO) to award one spouse a portion of the other spouse’s retirement benefits because retirement plans are considered marital property and, typically, the largest marital asset. However, a QDRO can also be used to retrieve all or a portion of the child support arrearages from the husband’s 401(k) plan.
You may have a client similar to an individual we will call “Mary” to protect her privacy. Like many other divorced spouses across the country, Mary had not received child support in several years, in this case over 10 years, on behalf of her four children. Mary recently received a judgment against her ex-husband that determined and specifically set out the amount that was owed, $160,000, which included actual payments missed, along with statutory interest.
Mary’s attorney contacted our firm to discuss her problem. Our conversation revealed that one alternative that had been overlooked was the use of a QDRO to retrieve all or a portion of the child support arrearages from the former husband’s 401(k) plan.
While QDROs are used to award one spouse a portion of the other spouse’s retirement benefits, they can also be used to tap into a retirement plan to pay off child support arrearages.
A QDRO is a separate court order directed to the retirement plan instructing the plan administrator to pay a portion of the employee/participant spouse’s account, or benefits, in the retirement plan to the other nonparticipant spouse. Division of pensions, whether it is for property division, child support, or alimony, is not a decision to be made by the employee/participant spouse with the pension, but a matter of state and federal law.
Mary’s attorney was under the mistaken impression that the retirement plan in which Mary’s ex-husband participated was protected and could not be alienated unless divided as part of a marital estate. However, one of the three uses of a QDRO is ensuring payment of child support, with the other two being for alimony and division of marital property.1 An “alternate payee,” as used in the Code, is defined as a spouse, former spouse, or dependent.2
Another misapprehension of the attorney is that since Mary’s ex-husband resided and worked in another state, the process would be quite cumbersome and result in an exorbitant amount of time, energy, and fees. This generally is not the case since, again, most qualified (nongovernmental) retirement plans are governed under federal law.3 Where the employee participant spouse resides and where the plan assets are held, are, for the most part, irrelevant.
Attorneys have long wrestled with the problem of getting their clients the child support they have been awarded. An attorney who is able to obtain for the client a judgment for child support arrearages is well on the way to collecting child support arrearages in a lump sum payment that should have been paid to the client in the form of periodic child support over several years.
Not only can the custodial parent who’s owed the back child support possibly collect a lump-sum equivalent of the arrearage, most states provide for statutory interest to accrue over the period of the arrearage.
Current child support obligations are usually paid on behalf of the children to the custodial parent, or to a state agency (that manages a Title IV-D Program). However, in the case of arrearages, many times the payment from the retirement plan can be made directly to the custodial parent, pursuant to the QDRO. Additionally, the distribution should be taxable to the plan participant spouse and not taxable income to the custodial parent.
A problem with taxation often arises when the plan procedures specifically mandate that the recipient of a QDRO distribution is responsible for reporting it as income, as well as reporting the 20 percent withheld for taxes. This is in direct conflict with the Internal Revenue Code, which specifically states that child support is not taxable as income to the custodial parent.
Therefore, the QDRO should be clear that the distribution is for purposes of child support arrearages, and that the distribution is to be taxable to the plan participant spouse. Because the contributions into the 401(k) plan are often made with before tax dollars, the distribution to be paid to a custodial parent via a QDRO should be made “net” of taxes, that is, the QDRO should reflect the actual amount to be paid to the custodial parent or to the “alternate payee” in plan terminology. This is the case since, under normal circumstances child support is paid with after-tax dollars to the custodial parent and should not be reported as income by the custodial parent.
Even if the children have reached the age of majority, and assuming a judgment is entered awarding the arrearage to the custodial parent, it goes without saying that these monies are in effect repayment for raising the child, or children in many cases, when the child support was really needed and where the financial support was borne by the custodial parent.
A word of caution! Not all 401(k)s, savings plans, profit sharing plans, and the like allow for an immediate lump-sum distribution to be made to the nonparticipant spouse. In fact, some plans make distributions only periodically, at times specified under the terms of the plan ( i.e., quarterly or annually), or worse yet, at a predetermined age of the plan participant, e.g., no earlier than the participant’s age 50, although admittedly this is not a common provision.
Further, not all plans can be divided by a QDRO. For example, municipal plans and 457 deferred compensation plans (similar to a 401k in the private sector) are not all subject to division by QDROs. These plans, however, generally will accept income deduction orders for purposes of collecting current child support obligations. Plans, that do accept a division of retirement benefit, however, that do not accept the title QDRO are federal plans, military plans, railroad retirement plans, and some state retirement system plans.
In another case, not only did we draft QDROs to divide the participant/husband’s pension and 401(k), because these two plans were considered marital property, but subsequent judgments yielded subsequent QDROs on the 401(k) to pay the nonparticipant spouse back child support in lump sums, not once, but twice. That is, a few years after the second QDRO regarding child support arrearages was entered, the husband had accrued another arrearage, another judgment was obtain by the custodial parent for the new arrearage, and a third QDRO was entered on the same 401(k) plan. Unfortunately for the husband, by the time he had terminated employment and moved on, almost his entire 401(k) account balance went to paying off his child support arrearage.
The procedure is relatively simple. Once the arrearage is determined, a judgment is obtained from the court to award the amount of the arrearage. An examination of the plan participant spouse’s account statements, or other plan documents, will then reveal what can be withdrawn from the retirement plan with a QDRO. A QDRO is necessary since, in the eyes of the IRS, it is the only means available to alienate, or segregate, the retirement account or benefits from the individual who has the retirement benefits. The custodial parent, or alternate payee under a QDRO, should then also be the beneficiary as to the awarded share should the plan participant spouse, the payor, die before or during retirement.
But what if the only retirement benefit is not a 401(k) with an account balance, but a pension plan, paying a monthly retirement benefit at a certain retirement age? Generally, pension plans, or defined benefit plans, do not have account balances nor do they provide monthly/quarterly account statements, which is why they are sometimes overlooked as an asset in divorce. But these types of retirement plans only pay out a monthly retirement benefit at a certain retirement age, based most often on the participant’s years of service and/or average annual income.
With these types of plans, once the lump-sum arrearage amount is determined, with or without interest, this amount can then be compared to the lump-sum present value of the spouse’s “accrued” monthly retirement benefit. The accrued benefit, determined as of a certain date, is the monthly benefit the individual would receive per month at retirement if they were to terminate employment as of a particular date, say, for instance, the date the court determined the arrearage. The lump-sum amount of the arrearage compared to the lump-sum value of the retirement benefit as of that date, then determines what percentage of the monthly retirement benefit ought to go to the custodial parent, as a future repayment of the child support that should have paid in the past.
Say, for example, the spouse with the pension, the “participant” in the pension plan, has earned so far, or “accrued,” a monthly retirement benefit of $1,000 per month to begin at age 65. The lump-sum present value today, assuming the participant spouse is 45 years old, is $30,000. Should the child support arrearage be $30,000 as well, the custodial spouse potentially could be awarded 100 percent of the accrued monthly retirement benefit (determined as of the date of the court award) in the noncustodial spouse’s pension paid in the form of a monthly benefit at the plan participant spouse’s earliest retirement age. The percentage of the monthly benefit to be awarded, as repayment, should be based on an after-tax lump-sum present value of the monthly retirement benefit compared to the arrearage amount, since child support payments should be net of tax withholding.
As most defined benefit pension plans are designed to pay out a monthly retirement benefit, they generally will not pay out lump-sum distributions under any circumstances, excepted if defined as a cash balance plan, a hybrid form of defined benefit plan. Therefore, one may not have a choice but to receive their portion of the arrearage in the form of a monthly benefit.
In some cases, the spouse who owes the back child support may have moved out of the state, thereby making it more difficult to collect the arrearages. Since a divorced spouse can look to the Social Security Administration for possible benefits under a divorce spouse’s annuity, they may find it possible to locate the spouse, or the spouse’s employer, through the help of the Social Security Administration. It may then be possible to inquire about potential retirement benefits through the employer.
Whether your client is going through a divorce, or has gone through a divorce in recent years, the retirement benefits may be an ideal source of income to pay off child support arrearages. Useful information can be obtained, via the Internet, by visiting the Social Security Web site, www.sss.gov, the Federal Office of Child Support Enforcement at www.acf.dhhs.gov/programs/cse, or on QDRO’s for child enforcement and collection/QDRO distributions, and IRA rollover accounts at www.vecon.com.
1 I.R.C. §414(p); §206(d)(3)(B) of ERISA; and 29 U.S.C. §1056(d)(3)(B).
2 See I.R.C. §414(p)(8) and ERISA §206(d)(3)(K).
3 E.g., Internal Revenue Code sections, as well as ERISA (Employee Retirement Income Security Act).
Timothy C. Voit is a financial analyst and president of Voit Econometrics Group, Inc., with offices in Naples, Charlotte, N.C., and Milwaukee, Wis. Voit has been admitted as an expert in both state and federal courts and has worked with many law firms to equitably divide (QDRO) retirement benefits for both private and governmental plans. Dan Meeks also made contributions to this article.
This column is submitted on behalf of the Family Law Section, Evan R. Marks, chair, and Kristen Adamson-Landau, editor.