Using a QDRO to Collect Support Payments
Unpaid Support Payments
About half of all annual child support in the U.S. goes unpaid. According to the National Child Support Enforcement Assn. in Washington, D.C., only $13 billion, or 56%, of the $23 billion due was collected for fiscal year 2000.
Methods of Obtaining Payment
There are many methods used to collect child support, but one of them is a Qualified Domestic Relations Order or QDRO. A QDRO is a document that is usually prepared by an attorney or other professional that is signed by the judge and sent to the administrator of a retirement plan, such as a 401K. Typically a QDRO is used at the time of the divorce to divide retirement assets. The plan administrator moves a portion of the account into the name of the “alternate payee”. QDRO’s can also be used to pay lump sum amounts owed for child support and may also be used to pay for maintenance. Additionally, if the parent is evasive in his obligation to pay child support by quitting a job, the QDRO can be one method to assure payment when other remedies have failed.
Obtaining Lump Sums
If a payor has not been current on child support, or maintenance payments, and an arrearage accrues, a QDRO can be prepared for the plan administrator requesting a lump sum to be disbursed to the alternate payee. Child support payments are not taxable, but maintenance is generally tax deductable to the payor and taxable to the payee. The person receiving the lump sum for maintenance will have to pay income tax on the payment. Since the receiving party should not have to pay the income tax on the lump sum payment, the drafter of the QDRO should indicate that if the lump sum is large enough, the cost of the income tax is included in the payment. The QDRO can also be written so that the costs of preparation of the document are included in the payment.
Types of Plans
- Municipal plans and 457 plans are not all subject to QDRO’s. Plans that do not accept QDRO’s may allow income assignments or garnishments for lump sums.
- The QDRO can be used to tap a defined contribution plan. This is the type of plan that includes 401K and other similar retirement savings plans.
- A Defined Benefit Plan is generally a traditional pension. These accounts do not have a present value, so participants are provided with an estimated amount on an annual basis. The funds in a Defined Benefit Plan cannot be accessed by a QDRO, but a lump sum and/or the monthly benefit can be paid to the alternate payee at the earliest time the participant can choose to retire. Social Security is a form of a Defined Benefit Plan. Social Security can be accessed to pay back child support after the owner of the account retires.
Some plan administrators will make monthly payments for support, as well. This is a complicated way to pay current child support so not all plans allow monthly payments.
To collect unpaid support from a retirement plan, you need to provide the name of the financial institution where the retirement account is held and the current value of the plan. Although the amount of retirement assets was disclosed during the divorce process, the location of the accounts may have changed if the payor has changed jobs or has moved the plan to another custodian. Locating the plans may require filing a request for discovery or requesting the exchange of financial information.
Location of the Plan is Not an Issue
The fact that the participant works for a company in another state should not be problematic because the QDRO can easily be forwarded to the plan administrator in the other state. The federal Employee Retirement Income Security Act) requires plan administrators to respond to out of state orders.