When going through a divorce, one of the most overlooked yet important topics involved will be the potential need to divide up retirement accounts. Whether it is your retirement that will need to be divided, your spouse's, or both of yours different rules apply for various sorts of accounts. If you are a state employee of Texas, then your retirement savings have specific guidelines as set forth by the state when it comes to how to divide up those accounts. It is understandable if your retirement is not the foremost concern on your mind now but that does not make it any less important.
Under the Texas State Employee's Retirement System, divorce is counted as a qualifying life event when it comes to your benefits. Once you and your spouse are legally divorced then your spouse will no longer be able to receive health insurance benefits through the end of the pay period during which your divorce was finalized. This may be a minor concern to some of you but for others who have chronic or ongoing health issues, this may be an incredibly important topic to consider. If you are receiving benefits of this sort through your spouse's employment with the state, you need to consider your options for health insurance after the divorce. The open market, government marketplace, COBRA, and your employer are potential sources of health insurance for you. Your children must always be covered by health insurance so their coverage through the ERS would not be impacted by a divorce.
Within one month of getting divorced whoever has the retirement plan through the state must contact them to update the benefits based on the results of the divorce. Let's suppose that you are the spouse who has a retirement plan as a state employee. You can enroll or change your health, dental, or life insurance options for yourself. Many people go through a divorce and do not consider the need to follow through with these actions. Life insurance is a major issue in a divorce. Here is why you should consider looking at your life insurance policy or policies before the conclusion of your divorce.
A word on life insurance
Life insurance, even more than retirement savings, is about the least interesting subject in the world of Texas divorce law. However, when you stop to think about the impact that life insurance can have it is mind-boggling that many people do not have this simple safety net set up in their lives. Consider that a life insurance policy represents security for your family or a specific beneficiary if you were to pass away unexpectedly. When you consider all the benefits of life insurance there is a handful that I think are worth mentioning here in this space. Starting with- do you even need life insurance?
Why do you have car insurance? Well, the reason that I have car insurance is that if I hit someone else while I was driving, I wouldn’t necessarily have the cash on hand to pay for a trip to the doctor or a hospital visit if the wreck was really bad. I’m willing to bet that most of us out there fall into this category. As a result, we attempt to take care of others and ourselves by having car insurance fill that void for us. Car insurance will pay for medical bills on behalf of another person who is injured because of our negligence behind the wheel. Payment may not always work out this easily but the bills will be paid once our insurance company accepts liability for our having caused the wreck.
Next, car insurance will pay for damages to our vehicle if someone hits us and it is their fault and not ours. Technically, you would have the option to go through your insurance and they would be able to go back to the at-fault driver's insurance and ask them to be compensated for having paid our bills (this is known as subrogation). Otherwise, our car insurance will pay for a rental vehicle, repairs to our vehicle, or even a new vehicle if the repair shop determines that the vehicle is totaled and the cost to repair is greater than the value of the vehicle. Either way, very few people can "self-insure" through something like this. We need insurance to be able to foot the bill for us in those circumstances where we lack the cash to take care of a problem ourselves.
This takes us back to life insurance. Life insurance is necessary when someone else- a spouse, a child, or another person- depends on you for survival. If your income pays the bills, buys food, etc. for another person then you fall into this category. Even if you do not have children you need to consider whether your spouse relies on you for income to support him or her. If this is true, then you need to have life insurance for that person. You must have life insurance in this situation. We are not a life insurance company so you can do the research yourself on what type of insurance to purchase. However, if you were to pass away unexpectedly you need to consider what sort of position you would leave your family in and how they would be able to recover from that loss beyond an emotional/relational level.
Once you have sufficient resources in the bank then you can consider no longer having life insurance. A paid-off home, money in the bank, your spouse having an income of their own, and fully funded college funds. These are the sort of circumstances that I think you could consider pulling back on the life insurance and no longer paying the premiums on those items. In other words, you may still have some work to do on the income and savings side to facilitate that sort of plan. In the meantime, your life insurance through the state may be exactly what your family needs in the event of an unexpected death.
Changing beneficiary designations upon a divorce
Whether we are talking about a life insurance policy or a retirement account through your state employer, you need to make sure that beneficiaries are updated when major events happen in your life. Death and divorce are two major life events but unfortunately only one of those times allows you to update your beneficiaries. Most people list their spouse as the primary beneficiary on these types of accounts. You should check and make sure that you have updated your account beneficiaries immediately after the divorce. Your temporary orders in a divorce likely bar you from doing so while the divorce is ongoing so you should watch out before doing something that your court orders say you cannot do. Otherwise, update the beneficiaries on these accounts as soon as you are legally able to.
What are the consequences of your not updating beneficiaries? If you die and have not updated your beneficiaries, then the people listed in those plans get the money in the account. It's as simple as that. Even if you happen to have updated your will to reflect that you want your children, uncle, mother, sister, etc. to get the money instead of your spouse you will not be protected. The reason being is that the retirement account and life insurance policy are known as non-probate assets. These assets pass without having to go through probate or look at a wall. Once you pass away and the state is notified of your death it will go through the process of having the money sent out to the appropriate persons. If your ex-spouse is listed as the beneficiary, then she will get the money.
Even so, you may figure, your ex-wife is an honorable person that you trust will save the money for your children or will send it to the person that ought to have received it. Even if this is true and your ex-wife is the most honorable person in the world, that still doesn't mean that there won't be consequences for the wrong person getting your money. There are tax implications for money being sent out in this fashion. Your ex-wife may need to pay a substantial amount of money in taxes and fees to transfer the money. We know that people in your life could use as much of that money as possible. Essentially this is wasted money that otherwise could have been spent on useful endeavors and on people that truly could have used the money. Instead, your ex-wife in this example would need to spend some of the money to pay taxes that did not have to be paid had you updated your beneficiaries.
All in all, this is an avoidable mess that you could be putting yourself in. However, the way to avoid having this fate befall your family is to simply set a reminder to check out your beneficiaries after your divorce. Remember to not change beneficiaries before you can do so, but once the divorce is done and over with you should immediately update beneficiaries so that you can put that to the side and concern yourself with other aspects of your life. Again, this is not the most interesting subject in the entire world, but it is important and it can be an essential part of your post-divorce life that you get taken care of immediately.
What are your retirement savings objectives now that you are divorced?
You can begin to think about what your retirement savings objectives are now that you are single before the divorce is even over. You may need to adjust some aspects of your retirement savings depending on what you have saved already and what percentage (if any) you are receiving from your spouse's retirement account. No matter what the circumstances are you should look at your statements and contact the retirement plan to ask questions and see if they have any specific information to convey to you after your divorce.
Life after your divorce
As we talked about earlier, the first thing that you can and should do after your divorce becomes official is to update your beneficiaries on any accounts where your spouse is listed as the primary beneficiary. This can be done by requesting forms through the employee retirement services website and then submitting them to ERS. If you do not do this then the ERS will pay your benefits out to the person named on the document- likely your ex-spouse. Your estate or a secondary beneficiary would then get the money if you do not name another person or entity as your primary beneficiary.
Setting up a qualified domestic relations order through ERS
A Qualified Domestic Relations Order (QDRO) is a legal order that goes into effect after a divorce is done and over with. A QDRO will split up and change ownership of a retirement plan to give a divorced spouse their share of the asset. Your final decree of divorce will spell out this share and will determine how ERS needs to divide up your retirement plan, if at all. The retirement plan must determine that the QDRO is valid and contains the required language. Otherwise, the order will be invalid and will not allow for the transfer of money to your ex-spouse.
ERS requires that you use their specific language for the QDRO because state law requires it. The language that you will find in an ERS QDRO will not be found in other QDROs for private employers. The difference here is that ERS does not fall under federal QDRO laws like ERISA. A QDRO for ERS does not need to mention those laws within the document. If a mistake is made and mention is made of these inapplicable laws a problem will arise and the QDRO will be rejected. This delay means that time and money will be wasted going back and correcting any errors that are made. A completely new QDRO will likely need to be drafted because of the error.
How do you submit a QDRO after your divorce to ERS?
Fortunately for you and your spouse, ERS provides a model QDRO online that you can see. It is recommended that you get this model QDRO to your attorney early in the case so that their office can use that template as a guide if your retirement account does need
to be divided. However, keep in mind that the model QDRO cannot simply include your names and be valid. It must also mirror your divorce decree as far as how the plan is to be divided up. Attention to detail is extremely important in this regard.
A judge will need to sign the QDRO for it to take effect. The best time to do this is to submit the QDRO along with your final decree of divorce to the judge before the conclusion of the case. That way the judge can review the documents all at the same time and will hopefully sign them in one sitting. That way you and your attorney do not have to file a motion to enter or for another hearing with the judge to sign and enter the QDRO into the record.
Once the judge signs the QDRO and it is certified by the district clerk then you should provide one of these certified copies of the QDRO and the divorce decree to ERS. ERS will then set about completing the division of your retirement plan according to the terms of the final decree of divorce and the QDRO. The QDRO original, a certified copy can be mailed to ERS in Austin at either their physical address or their PO Box.
When does an ex-spouse get their money after a divorce?
If your ex-spouse is still working but you were told that you would still be able to get your share of the retirement income right now you need to be aware that a state employee cannot withdraw their retirement contributions while still a state employee. Because of this, you as the “alternate payee” would not be able to do so, either.
What this does is put you in a position where you cannot have the funds immediately distributed to you upon divorce. If your spouse stops working for the state and then asks for their contributions to be paid to him or her in that case you would be able to get your share, as well. You will not be able to determine whether your spouse withdraws their retirement funds. Your ex-spouse would need to retire and start to receive a monthly payment, quit and take a refund of the retirement account or die, and then the account becomes payable on death to whoever is a designated beneficiary.
Questions about the material contained in today’s blog post? Contact the Law Office of Bryan Fagan
If you have any questions about the material contained in today’s blog post, please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed family law attorneys offer free-of-charge consultations six days a week in person, over the phone, and via video. These consultations are a great way for you to learn more about the world of Texas family law as well as about how your family’s circumstances may be impacted by the filing of a divorce or child custody case.