Retirement Plan In Pay Status – Is It Income or Can There Be a QDRO?

Q: For divorce settlement, if a retirement plan is already paying the former employee, is this income or can there be a Qualified Domestic Relations Order (QDRO) for division of marital property?

A: You definitely want to treat the retirement payout as an asset subject to equitable distribution. If husband and wife were not living together and no support payments were made, the retired employee spouse should be charged with getting retirement payments post separation.

If the plan is in pay status, as it is, a QDRO probably will not be available.

You can agree to an attachment of the payments as alimony though DRO as another vehicle to secure payment from the former employee to the non-employee. In fact if the payment is treated like alimony the non-employee spouse should get 50% of the pre-tax amount and pays taxes on it as alimony (maybe at a lower rate that the former employee and the former employee gets to deduct the pre-tax amount as alimony. It may be a type of win-win. Really it’s the same as getting a QDRO tax wise. But it may be simpler to get a DRO order of alimony to divide the retirement payment than the usual QDRO aggravation.

Since the pension is in pay status the non-employed spouse likely has the survivor benefit already. In an ERISA plan the non-employee spouse is given a 50% survivor benefit at the employee’s retirement unless the non-employee spouse waived it.

That also means the non-employee spouse as an asset of value the survivor interest. That can be very helpful. It should not be ignored.

By Mary Cushing Doherty, October 2014