Imagine a situation where a potential client walks into your office with a child support issue they want you to fix. It could be the non-custodial parent quit their job, moved to a different state, or just simply fell off the face of the earth. As you are collecting information on the facts of their case, you might want to ask the custodial parent is where does the non-custodial parent currently works and where did the individual work in the past? The one source of child support payments often overlooked is a retirement plan, whether it be a 401(k) or a pension.
I have had several cases where I have been retained to tap into retirement plans to pay off child support. Some cases involved existing child support obligations and some cases where the custodial spouse was awarded a lump-sum arrearage amount, pursuant to a judgment, on past child support.
In a prior case involving a banker who was convicted of embezzling funds, and was incarcerated, the wife was owed $220,000 in child support with no ability to collect, given the now ex-husband was in prison. The first question is where did he work and what kind of retirement benefits did he have. In this case the husband had in place a 401(k) account and a pension through his previous employer.
While it is well known that retirement plans are protected, so there is no action that can alienate someone from their retirement benefits. This is true when it comes to creditors, but not true when support is involved or, as is most often the case, the retirement plan is being divided as a marital asset. The instrument used in facilitating a transfer from one party to another is a Qualified Domestic Relations Order (QDRO), a document specific to a retirement plan. There are thousands of retirement plans all having their preference as to what they want to see in an Order. In other words, there is no one Order (QDRO) that works for all plans.
Getting back to the banker who was in prison, once it was discovered that he had a fairly sizable 401(k) balance, I was able to prepare a QDRO to access those funds to pay current and past child support. The authority for doing so? The Internal Revenue Code and ERISA, an acronym for the Employee Retirement Income Security Act which was amended in 1984 for the purpose of awarding a spouse, or custodial parent, child support, alimony, or as a marital asset. An alternate payee in a QDRO can only be a spouse, former spouse, or dependent of the individual in the retirement plan.
In summary, the banker thought he was going to get out of prison possessing the ability to live off, what he thought, would be his sizable 401(k). Instead, most, if not all of it was used to pay child support until the children reached the age of majority.
The pension, albeit it pays a monthly pension benefit, can be used to pay the former spouse, or award a former spouse, child support that could not have been paid as a lump-sum, but instead is owed to them for having supported the children. Pension plans get a little tricky, but if there is no 401(k) to tap into, and the former spouse is holding a judgment for past child support arrearages, the pension plan is another source. An issue you may encounter is the treatment of taxes on the client’s awarded share. Most plans will only tax the recipient, not the plan participant.
This poses a problem since child support is not taxable to a custodial parent, but instead taxable to the non-custodial parent. The way to deal with this, when the retirement plan in question is a 401(k), is to gross up the amount to account for the tax liability incurred by the custodial parent, and in the event the plan will not assign the tax liability to the plan participant.
In another case, a non-custodial parent was terminated from their job because of alcoholism. As it requires a period of time before a terminated employee can have access to their retirement monies to be rolled over or cashed out, a QDRO was used to secure child support prior to the plan making a distribution to the plan participant.
These are just a few examples of how powerful of a tool QDROs can be. With $16 billion dollars in child support going unpaid each year, $96 billion on the aggregate, and with roughly $5 trillion dollars sitting in 401(k)s in the United States, it only makes sense to include the potential for a QDRO in your arsenal of ways to help you client collect on child support.
Contact Franks & Rechenberg, P.C., where we specialize in helping you defend your case.