Contributed by: Jacki Roessler, CDFA®
In May of 2019, Michigan’s Attorney General, Dana Nessel announced the collection of more than $275 million in child support owed since the 2003 formation of the Attorney General’s Child Support Unit (www.michigan.gov). Of course, back child support is a problem in every state, not just Michigan. In fact, this socio-economic problem severely penalizes the children whose custodial parent is dependent on child support to pay their monthly bills.
A little known recourse to collect back support is with a Qualified Domestic Relations Order (QDRO, for short).
A QDRO is a legal document that assigns money from an employee’s qualified retirement plan (401k-type plan or pension), pursuant to a divorce or domestic relations matter. Payments pursuant to a QDRO can be for the purpose of child support, alimony, or property division. Further, the recipient (“Alternate Payee”) of a QDRO may be a spouse, former spouse, child, or dependent of the employee (“Participant”). (ERISA §206(d)(3)(B)(i); IRC §414(p)(1)(A)).
Let us consider the hypothetical case of Jenny and Mike, who were divorced 10 years ago and have two minor children. Pursuant to their divorce, a court order required Mike to pay Sandy $1,500 per month in child support. Four years ago, Mike retired from his job with General Motors and moved to Florida. He currently owes Jenny $72,000 in back support, plus interest.
Jenny was fairly certain that Mike was receiving pension benefits through General Motors. She and her attorney hired an expert to prepare a QDRO awarding her a monthly sum for a period of 36 months, until the arrearage was paid off. The QDRO was quickly approved, and Jenny immediately began receiving payments directly from the pension plan. It’s important to note that the payments were treated as taxable income to Mike, not Jenny, as child support is not taxable income to the recipient.
In another case, Jill owed her ex-husband, Bob, $15,000 in back child support. Jill wasn’t retired or receiving a pension, but she did have a 401(k) with her employer. Bob’s attorney hired an expert to draft a QDRO on Jill’s 401k, which awarded him a lump sum of $18,750. This sum represented the amount owed ($15,000), grossed up for the 20% in taxes the plan would be required to send to the IRS. Again, the tax liability would be the responsibility of Jill, not Bob, because the QDRO was for the purpose of child support.
A few important things to note:
One, back child support doesn’t ever “go away”. A QDRO can always be used today for an arrearage built up in the past. Second, there is no limit on how many QDROs can be prepared assigning money to an Alternate Payee on a single qualified retirement plan. Further, a QDRO can assign up to 100% of the entire account balance or monthly pension benefit. Last, QDROs only apply to qualified plans; they aren’t applicable to IRA or non-Qualified Annuities.
Jacki Roessler, CDFA®, is a Divorce Planner at Center for Financial Planning, Inc.® and Branch Associate, Raymond James Financial Services. With more than 25 years of experience in the field, she is a recognized leader in the area of Divorce Financial Planning.
Any opinions are those of Jacqueline Roessler, CDFA®, Branch Associate for Raymond James Financial Services, and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
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