Qualified Domestic Relations Orders (QDROs) in Illinois

 Posted on November 07,2024 in Division of Assets

When going through a divorce in Illinois, many people are faced with the complex task of dividing marital assets, including retirement accounts. Retirement accounts often make up a significant portion of a couple's shared wealth, which means that dividing them can have serious financial consequences both in the present and the future. 

However, dividing retirement accounts is not as straightforward as splitting a bank account or personal property. This process requires careful legal and financial planning, especially when it comes to avoiding tax penalties or unintended distributions.

This is typically managed through the use of something called a Qualified Domestic Relations Order (QDRO). An experienced Illinois family law attorney with Weiss-Kunz & Oliver, LLC can help you draft these orders to help ensure a fair division of retirement benefits that makes the process smooth and complies with Illinois law.

How Much of My Retirement Account Belongs to My Spouse? 

Determining whether a retirement account, or a portion of it, is considered marital property depends mostly on when contributions were made to the account. Under Illinois law, assets acquired during the marriage are typically classified as marital property, while assets acquired before the marriage are usually considered non-marital property. 

This rule also applies to retirement accounts: Any contributions made to a 401(k), pension, or IRA during the marriage are usually treated as marital property, while contributions made before the marriage are considered the separate property of the account holder.

The court’s goal is to divide only the marital portion of the retirement account, which often requires a complex calculation, especially with defined benefit plans like pensions. The court will examine factors such as:

• The length of the marriage

• The duration of contributions to the retirement account during the marriage

• The account’s growth over time

In many cases, forensic accountants or financial experts are hired to help determine the precise marital portion by analyzing contributions, appreciation, and any income generated by the retirement assets during the marriage. Once the marital portion is identified, the court will decide how to divide it based on additional factors like each spouse's financial needs, earning potential, and the contributions each spouse made to the marriage (financially and otherwise).

Note that spouses can decide between themselves how to settle any part of their estate, including retirement accounts. Some spouses prefer to forgo regular payments from a QDRO or Qualified Illinois Domestic Relations Order (QILDRO) for lump sums of cash or ownership of other assets. Whether a couple ultimately needs to set up a QDRO or QILDRO will depend on how they decide to allocate their marital estate. If a couple cannot decide on their own or with the help of mediation, a court will step in to decide for them. 

How Are Retirement Accounts Divided Under Illinois Divorce Law? 

As mentioned previously, retirement accounts are generally considered marital property if contributions were made by the spouse who owned the account during the marriage. This means that accounts such as 401(k)s, pensions, IRAs, and other retirement savings accumulated while the couple was married are subject to division in a divorce. Illinois courts follow the principle of "equitable distribution," which means that marital assets, including retirement accounts, are divided fairly but not necessarily equally.

The process of dividing retirement accounts can vary depending on the type of account. For instance:

• Defined Contribution Plans (such as 401(k), 403(b), and 457 plans) are accounts with balances that can change based on contributions and investment gains or losses. These plans often require a QDRO to distribute benefits and payments after a divorce.

• Defined Benefit Plans (such as pensions) provide a predetermined monthly benefit at retirement. Dividing these requires detailed calculations to determine each spouse’s share of the future benefits.

A QDRO is typically necessary to divide employer-sponsored retirement plans without incurring tax penalties. However, when dividing Illinois public pensions, the QILDRO is the specific form of domestic relations order required. Each of these orders needs to be written carefully to meet Illinois requirements and to protect both parties' interests.

What Is a QDRO?

A Qualified Domestic Relations Order, or QDRO, is a legal order that establishes the right of a former spouse to receive a portion of the benefits from the main beneficiary’s retirement plan. Federal law requires a QDRO to divide certain types of retirement accounts under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code. QDROs allow retirement assets to be divided without triggering penalties or tax consequences that would normally apply to early distributions.

QDROs vs. QILDROs

While QDROs and QILDROs serve similar purposes, they are not interchangeable. Here are some critical differences:

• Governing Law: QDROs are governed by federal law (ERISA), while QILDROs follow Illinois state law.

• Applicable Plans: QDROs apply to private retirement plans, whereas QILDROs are specifically for Illinois public pensions.

• Participant Consent: A QILDRO may require the participant’s consent, especially for pension accounts established before July 1, 1999, which is not typically required for a QDRO.

• Plan Approval Process: QILDROs have stricter requirements for format and must be submitted to the specific Illinois pension fund for approval.

What is the Approval Process for QDROs and QILDROs?

Once drafted, a QDRO or QILDRO must go through a formal approval process with the retirement plan administrator. This process ensures that the order complies with federal regulations (for QDROs) or Illinois law (for QILDROs). If the order is not accepted, it may need to be amended to meet specific criteria, causing delays. If you are not sure who your retirement plan administrator is, your attorney can help you work with your employer or HR to figure out who you need to talk to. 

Approval for QDROs

For QDROs, the plan administrator will typically:

• Review the language of the QDRO to confirm compliance with ERISA.

• Notify both parties of approval or necessary changes.

• Implement the QDRO according to the divorce decree’s terms, allowing payment to the alternate payee to begin.

Approval for QILDROs

For QILDROs, the Illinois pension system’s approval process includes:

• Ensuring that the QILDRO adheres to the Illinois Pension Code.

• Verifying whether a spouse’s consent is needed based on the start date of pension contributions.

• Confirming that payments are scheduled according to the QILDRO’s terms.

Common Challenges with QDROs and QILDROs 

Dividing retirement benefits in Illinois divorces through QDROs and QILDROs can present various challenges, including:

• Complex Valuations: Defined benefit plans require complicated actuarial calculations to determine the current value of future benefits, which can be challenging without professional assistance. Getting specialists involved may be necessary, especially if there are questions about how much of the account is marital property vs. personal property. 

• Errors in Drafting: Failing to comply with plan-specific or state-specific requirements can result in a QDRO or QILDRO being rejected, delaying the distribution of funds.

• Poor Communication: Miscommunication between the parties, attorneys, and the plan administrator can create misunderstandings about benefit distribution.

An experienced Illinois family law attorney with Weiss-Kunz & Oliver, LLC can help ensure that QDROs and QILDROs are properly drafted and implemented, helping to protect both parties’ financial interests. 

Important Details About Private QDROs in Illinois

For a QDRO to be effective and legal, it must meet specific requirements, including:

• Detailed Information: A QDRO must include the name and mailing address of both the spouse who is the original account holder and the spouse who will be receiving benefits through the QDRO.

• Clear Instructions for Division: The QDRO must state the percentage or dollar amount of the benefit to be assigned to a spouse, along with the method of payment (lump sum, installment, etc.).

• Compliance: Each retirement plan has its own rules and requirements for QDROs, so the order must be drafted to comply with the plan’s provisions. An attorney works with divorcing spouses and their plan administrators to understand the exact requirements of a specific plan.

In Illinois, QDROs are usually used to divide private-sector retirement plans like 401(k)s and pensions governed by ERISA. Once the QDRO is drafted, it must be approved by the retirement plan administrator to ensure it complies with state and federal regulations. 

Understanding QILDROs for Illinois Public Pensions

For Illinois public employees with state or municipal pensions, retirement benefits are managed differently, meaning that a QDRO cannot be used. Instead, Illinois law requires a Qualified Illinois Domestic Relations Order (QILDRO) to divide public pension benefits. QILDROs apply to members of state-run retirement systems, such as:

• Teachers' Retirement System

• Illinois Municipal Retirement Fund 

• State Employees’ Retirement System 

• State Universities Retirement System

A QILDRO is similar to a QDRO in that it manages a spouse’s right to a portion of the retirement benefits. However, it follows Illinois state laws rather than federal ERISA guidelines and has distinct requirements:

• Specific Format and Language: The Illinois Pension Code specifies the required language and format of a QILDRO, which must be strictly followed for it to be effective.

• Consent of the Participant: If the participant began contributing to the pension fund before July 1, 1999, he or she must consent to the QILDRO. This makes it essential to determine when contributions began.

• Approval by the Pension System: After drafting, the QILDRO must be submitted to the appropriate Illinois pension system for review and approval. If approved, it becomes part of the divorce judgment, allowing the alternate payee to receive a portion of the participant's pension benefits.

Drafting QDROs and QILDROs: How an Attorney Can Help

Proper drafting of QDROs and QILDROs is crucial to avoid issues with retirement plan administrators, unexpected tax consequences, or unintended financial loss. Here are some important things that an attorney will help with during the drafting process:

• Accuracy in Describing the Benefit: Both QDROs and QILDROs must precisely describe the benefits to be awarded. For instance, specifying a dollar amount versus a percentage of the benefit could significantly impact each spouse’s share.

• Payment Options: For a QDRO, the attorney must determine if a spouse will receive a lump-sum payment, monthly distributions, or another form of payment. In contrast, QILDROs typically require payment in the form of periodic pension benefits.

• Survivor Benefits: When drafting QDROs or QILDROs, it is important to address survivor benefits. If the original account owner dies, the divorced spouse might lose the right to retirement benefits unless specific provisions are included in the order.

• Tax Implications: A QDRO allows an alternate payee to roll over funds into an IRA, avoiding taxes and penalties until distribution. QILDROs, however, require careful handling to avoid unintended tax consequences, as Illinois law governs their distributions.

• Working with the Retirement Plan Administrator: Since each retirement plan has unique requirements, attorneys must work with plan administrators to ensure compliance and prevent rejection of the QDRO.

Contact an Illinois Divorce Attorney for Assistance with QDROs and QILDROs

Dividing retirement accounts in an Illinois divorce can be very difficult, especially when dealing with QDROs and QILDROs. Each step of the process — from determining the proper division to ensuring compliance with federal or state requirements — demands careful attention and intimate legal knowledge. 

If you are going through a divorce and need help dividing your retirement accounts, call Weiss-Kunz & Oliver, LLC today. We help clients deal with uniquely challenging QDROs and QILDROs even when those clients do not pursue the rest of the divorce process with us. The skilled Elmhurst, IL family law attorneys at Weiss-Kunz & Oliver, LLC are here so you do not have to stress about the paperwork and process of dividing your retirement accounts on your own. Call us at 312-605-4041 today to get started.