Retirement plans and divorce settlements.

• Author: Brinker, Thomas M., Jr.

In determining asset allocations for property settlements, employee retirement plans are often a taxpayer's most significant asset. Since many jurisdictions treat retirement plans as assets subject to division in divorce settlements, more spouses are including them in divorce proceedings. Case law indicates that an attorney's failure to claim retirement benefits in a divorce settlement may be malpractice (Gorman v. Gorman, 90 Cal. App.3d 454 (Cal. App. 19791). Although retirement plans may become part of the divorce proceedings, the rules regarding their transfer are both complex and strict.

Under Sec. 401(a)(13), a qualified plan cannot assign or alienate benefits. However, there are several exceptions, including Sec. 401 (a) (13) (B), which permits certain assignments or alienation of benefits for qualified domestic relations orders (QDROs).

QDROs

A QDRO is a judgment, decree, court order or property settlement issued by a state domestic relations court. A QDRO creates or recognizes an alternate payee's (spouse, former spouse, child or dependent of a participant) right to all or a portion of a participant's retirement plan benefits.

Under Sec. 414(p)(2) or (3), the QDRO must contain specific information as to the amount or percentage of the participant's benefits to be paid to each payee, and cannot alter the amount or form of benefits provided by a plan.

If the payee of the QDRO is a spouse or former spouse, the payee is taxed on the distribution in the same manner in which the participant would have been taxed. if the participant contributed to the retirement plan, the participant's investment in the contract is used to determine the taxable amount. The spouse or former spouse is also entitled to use the special rules for lump-sum distributions if the participant was eligible for such treatment. If the payee is a child or dependent, the distribution is taxable to the participant.

IRAs

Sec. 408(d)(6) treats the transfer of all or part of an individual retirement account (IRA) to a former spouse as a nontaxable event. The transfer must result from a decree of divorce or separate maintenance, or a written instrument incident to a divorce. The transfer is not treated as a taxable distribution for income tax purposes to either spouse. After the transfer, the IRA is treated in all respects as belonging to the recipient...