Retirement plans are considered marital assets, but many attorneys are unaware that retirement plans can be tapped into for child support enforcement.
Tim Voit, Financial Analyst
Seeking advice from several lawyers, few with any practical advice to offer, one of my clients, Jennifer was offered only a few relatively impractical solutions to her dilemma of getting back child support: Threat of incarceration for the dead beat Dad? Unlikely. Not to mention that it is impractical since nothing will get paid if the father of the kids is in jail. Garnishment? Possible, unless the Dad, or Mom in some cases, quits his/her job, moves around, barters, or minimizes their income working partly for cash.
Jennifer, like many of the custodial parents across the country, was desperately looking for help in receiving some sort of financial support with raising her kids. She had not received child support in ten years on four children. Jennifer lived in one state while the father of her children lived in another. Over the years, Jennifer had accrued nearly $160,000 in child support arrearages. The father of Jennifer’s children was working for a large company and accumulated a rather sizable 401(k) retirement account, enough to cover the arrearage. Although $160,000 sounds like a lot, it is less than $4,000 per child, on average, per year. Take out the interest the State awarded, and the Dad’s actual child support obligation was far less than $4,000 per child per year. The point is, it can add up.
Jennifer was told that the father being in another state created legal obstacles (untrue) that would take years to overcome, and others claiming that retirement plans were protected and could not be alienated or even paid out until some time in the future (mostly untrue). Although your attorney may have good intentions, and be well versed in the laws of his or her own state, they may not be as familiar with the administration of retirement plans nor have the experience of tapping into retirement plans using QDROs.
Many custodial parents, typically the mother, are distressed with not receiving the child support promised in their divorce judgment. With more than a trillion dollars tied up in retirement plans, what is equally distressing is that very few attorneys across the country (estimated at less than one per cent) are aware that retirement plans can be tapped in to pay child support or child support arrearages. This is a $14 billion dollar problem annually in the U.S. alone, according to the Office of Child Support Enforcement. Total arrearages in the U.S. are a staggering $96 billion dollars
Typically (but not always) it is the wife or mother as the custodial parent who is burdened with the costs and energy of fighting for payment of child support, as court orders for support are often ignored by the non-custodial parent. Too many women have come to rely on their parents (the grandparents) to provide for clothing for kids, paying for the birthday parties, or other incidental expenses.
There is hope in an effective (but often overlooked) tool to receive child support and back child support, referred to as a Qualified Domestic Relations Order (QDRO).
A QDRO is a court order instructing a retirement plan to make certain payments to a spouse, former spouse, or dependent, often referred to as an “Alternate Payee.” In effect, the QDRO is a set of instructions from the court to the retirement plan. A good many retirement plans in divorce are divided by a QDRO because retirement plans are considered marital assets, similar to savings account or any other material asset. The wife typically receives one-half of the retirement account and the husband keeps his one-half in the retirement plan. The QDRO is also a court order which means that it has to be signed by a judge, but if you have a judgment of divorce or separate judgment outlining what is, or was, to be paid, you’re well on your way to getting the child support you deserve.
Another client of mine, Tanya, was awarded one-half of her husband’s 401(k) by the court (as a marital asset, and pursuant to her divorce) and was also to collect a set amount for child support per month. A QDRO was entered awarding her one-half the share of the 401(k) as a marital asset, however, because the husband failed to pay child support over the next few years following the divorce, a second QDRO was entered on the husband’s 401(k), paying Tanya the amount of the arrearage plus interest. A third QDRO was entered some years later, in effect, extinguishing the 401(k) for the remaining child support. The point here is that more than one QDRO can be entered on the same plan, but for different reasons, so long as it pertains to the payment of alimony, child support, or if it is being divided as a marital asset.
There are mainly two types of retirement plans: those with account balances like 401(k)s or savings plans (which are referred to as defined contribution plans), and those that are designed only to pay a monthly retirement benefit at a particular retirement age (referred to as defined benefit plans or pension plans). If the non-custodial parent only has an interest in a monthly pension benefit, some calculations will have to be performed to determine the lump-sum value of the monthly pension benefit, with the value being compared to the arrearage. The pension plan can then be ordered to pay the custodial parent a percentage of the pension benefit, in consideration for not having been paid the child support when needed.
The process of obtaining current or back child support from a retirement plan is quite simple, using the following steps:
- A court order or judgment must exist setting out the amount that should have been paid.
- Obtain a record of the amount owed in back child support by contacting your state’s child support enforcement agency,
- Have a Qualified Domestic Relations Order drafted by someone experience in QDROs, which meets the requirements of the plan. This, among other things includes identifying the plan, the parties, the amount owed, etc.
- Have the language of the QDRO pre-approved by the plan administrator of the retirement plan if possible, before submitting the QDRO to the court.
- Obtain the judge’s signature or court stamp, and consider the interest on the amount owed, typically left up to the court.
- And finally submit the court signed QDRO to the retirement plan (administrator)
A few important points to keep in mind
A county court cannot instruct a plan when or how to make a distribution. This is up to the plan pursuant to their distribution policy. An immediate lump-sum distribution may not be possible, not to mention “immediate” to a retirement plan administrator may mean in the next year or so depending on the plan’s cash out period. Child support is also not meant to be taxable to the custodial parent; therefore, the non-custodial parent should be responsible for the taxes on the distribution. A problem may exist if the plan assigns the tax liability to the recipient of the distribution. It is suggested that the custodial spouse (alternate payee) request from the court more than the actual arrearage to account for the amount of taxes withheld, usually 25 per cent more which equates to the 20 per cent that the plan is required to withhold on 401(k) distributions.
Lastly, the father in many cases, to his benefit, can request that payments of current child support be made from his retirement plan as opposed to his wages, thereby freeing more current income for daily living expenses.
When dividing retirement plans as marital property, or for payment of alimony or child support, a Qualified Domestic Relations Order is the only real solution. In Jennifer’s case, QDROs can apply to retirement plans even if the parties live in one state and the company is in another.
Tim Voit is a Financial Analyst and founder of Voit Econometrics Group, Inc, a forensic economics advisory firm (www.vecon.com). Tim Voit advises law firms around the country on QDRO related issues and the valuation of retirement plans in divorce and is author of Retirement Plan Benefits & QDROs in Divorce published by CCH and available through CCH’s online bookstore. Voit teaches at the International College and provides expert witness testimony on this issue as well as on the valuation of retirement plans in divorce and QDROs. © 2008 Timothy C. Voit