Breaking up: income tax aspects of retirement plan divisions.

• Author: Foss, Mary Kay
• Position: Financialplanning

the family home and retirement plans are often the two largest assets a couple getting divorced must divide. The general rule is that there are no income tax consequences when dividing marital assets. When it comes to retirement benefits, however, care must be taken since these benefits are highly taxed.

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Anti-alienation Provisions, Qualified Plans

Since Jan. 1, 1976, a qualified plan must provide that benefits may not be assigned alienated, garnished, etc.--with certain exceptions. The rules prohibiting the assignment or alienation of benefits do not apply to the payment or assignment of a benefit payable with respect to a participant under a domestic relations order (DRO) that is determined to be a qualified domestic relations order (QDRO).

With these rules, the employed spouse is the plan participant, and the spouse that expects to receive benefits is the alternate payee. This language distinguishes the spouse or former spouse from other creditors.

Attorneys usually draw up a DRO that specifies an amount and a procedure for dividing the benefits. The order is forwarded to the plan administrator, who must determine that it's in compliance with the qualified plan. A QDRO cannot require that the benefits be paid in a form not specified in the plan, or that the alternate payee receive increased benefits. A DRO that cannot be qualified because it conflicts with the plan is sent back for revisions.

A QDRO is a judgment, decree or order that:

(a) relates to the provision of child support, alimony or property rights to a spouse, former spouse, child or other dependent;

(b) is made under a state's community property or other domestic relations law; and

(c) creates or assigns all or a portion of a participant's plan benefits to the spouse, former spouse, child or other dependent of the participant.

Within certain limits, the QDRO can allow the alternate payee to begin receiving benefits as of the participant's earliest retirement age.

The Pension Protection Act of 2006 (PPA) dealt with some unanswered questions relating to payments to a former spouse incident to divorce. Many DROs are not "qualified" when initially presented, and the QDRO rules didn't provide specific guidance in such a situation. This created problems, especially if the plan participant remarried before the amount due to the alternate payee had been determined.

The PPA directed the Department of Labor to issue regulations on QDROs to clarify that a DRO that...