The divorce is finished. The judgment says the 401(k) is divided sixty-forty. Six months later the account is still entirely in one name, the plan has not heard of the divorce, and nobody has been paid anything.
This is the single most common gap between what a Wisconsin divorce judgment says and what actually happens, and the statute itself warns you about it. Wisconsin Statutes § 767.61 (5) (b) 1. requires every property-division judgment to include “notification that it may be necessary for the parties to take additional actions in order to transfer interests in their property in accordance with the division of property set forth in the judgment, including such interests as interests in real property, interests in retirement benefits, and contractual interests.”
That sentence is doing a great deal of work. A retirement plan is not obliged to care what a county circuit court ordered. It answers to its own plan document and to federal law, and federal law starts from the opposite premise: the money cannot be assigned to anybody.
Why a second order is needed at all
Federal law requires that pension plan benefits “may not be assigned or alienated.” 29 U.S.C. § 1056 (d) (1). That anti-alienation rule is what keeps a participant’s retirement savings out of reach of creditors, and on its face it would also keep the money out of reach of a divorcing spouse.
There is one door through it. Section 1056 (d) (3) (A) provides that the anti-alienation rule “shall not apply if the order is determined to be a qualified domestic relations order,” and that “each pension plan shall provide for the payment of benefits in accordance with the applicable requirements of any qualified domestic relations order.” A qualified domestic relations order — a QDRO, pronounced “quadro” by everyone who handles them — is the instrument that makes a plan pay somebody other than the participant.
So there are two decisions, made by two different institutions under two different bodies of law. The Wisconsin circuit court decides what share each spouse gets. The plan administrator decides whether the paper it has been handed is something it is permitted to honor. A judgment that is perfectly valid in Waukesha County can be rejected by a plan in another state without any of that reflecting on the judgment.
What makes an order “qualified”
The definition is not discretionary. An order must create or recognize an alternate payee’s right to receive all or part of the benefits payable to a participant, § 1056 (d) (3) (B) (i) (I), and it must clearly specify four things, under § 1056 (d) (3) (C): the name and last known mailing address of the participant and of each alternate payee; the amount or percentage of the benefits to be paid to each alternate payee, or the manner in which that amount is to be determined; the number of payments or the period to which the order applies; and each plan to which the order applies.
There are also three things the order may not do, under § 1056 (d) (3) (D). It may not require the plan to provide any type or form of benefit, or any option, not otherwise provided under the plan. It may not require the plan to provide increased benefits determined on the basis of actuarial value. And it may not require payment of benefits to an alternate payee which are required to be paid to another alternate payee under an order previously determined to be a qualified domestic relations order.
The first of those three is where well-drafted-sounding orders die. A separation agreement that promises an ex-spouse a monthly payment structured in a way the plan does not offer is not a defect in the plan; it is a defect in the order. The drafting has to be done against the plan document, not against an idea of how pensions generally work.
“Alternate payee” is itself defined, and more broadly than most people expect: any spouse, former spouse, child, or other dependent of a participant recognized by a domestic relations order as having a right to receive benefits. § 1056 (d) (3) (K). An alternate payee is treated as a plan beneficiary for purposes of federal pension law. § 1056 (d) (3) (J).
What Wisconsin decides first
Before any of the federal machinery matters, the circuit court has to divide the property. Upon every judgment of annulment, divorce, or legal separation the court “shall divide the property of the parties.” § 767.61 (1).
Most retirement money is squarely in the divisible pot. The exclusions in § 767.61 (2) (a) are narrow: property acquired as a gift from someone other than the other spouse, property acquired by reason of another person’s death — and that paragraph expressly names “payments made under a deferred employment benefit plan” and “an individual retirement account” among the things that can arrive that way — and property bought with funds from either source. An inherited IRA is therefore in a different position from the IRA you funded out of your paycheck. Even then the exclusion is not absolute: § 767.61 (2) (b) permits the court to divest a party of otherwise-excluded property where refusal to divide it would create a hardship on the other party or on the children of the marriage.
Everything else is presumed to be divided equally, and the court may alter that distribution — without regard to marital misconduct — after considering the factors in § 767.61 (3). Two of them bear directly on retirement assets. Paragraph (j) directs the court to consider “other economic circumstances of each party, including pension benefits, vested or unvested, and future interests.” Unvested benefits are not invisible. And paragraph (k) directs the court to consider “the tax consequences to each party,” which is the statutory hook for the point every client eventually makes on their own: a dollar in a traditional 401(k) and a dollar in a savings account are not the same dollar.
Wisconsin puts the coverture fraction in the statute
Where one spouse earned part of a pension before the marriage, some fraction of it is marital and some is not. In many states that allocation is a matter of case law. In Wisconsin it is written down.
Section 766.01 (4) (a) defines a “deferred employment benefit plan” broadly — a pension, profit sharing or stock-bonus plan, an employee stock-ownership or stock-purchase plan, a savings or thrift plan, an annuity plan, a qualified bond-purchase plan, a self-employed retirement plan, a simplified employee pension, and deferred compensation agreements, among others. Section 766.62 (2) then supplies the arithmetic: a deferred employment benefit attributable to employment occurring partly before and partly after the determination date is mixed property, and the marital-property component “is the amount which results from multiplying the entire benefit by a fraction, the numerator of which is the period of employment giving rise to the benefit that occurred after the determination date and during marriage and the denominator of which is the total period of employment giving rise to the benefit.”
That is the coverture fraction, by statute. A parallel rule in § 766.62 (1) (b) applies the same fraction where either spouse was at some point not domiciled in Wisconsin during the employment that produced the benefit. And unless a decree or marital property agreement provides otherwise, § 766.62 (2m) directs that a mixed-property deferred employment benefit be valued as of the dissolution or the employee spouse’s death.
Valuation itself is not a single exercise. The Wisconsin Supreme Court recognized long ago that there are at least three methods for valuing pension rights, and that whether any method is appropriate depends on the status of the parties and on whether the result is a reasonable valuation of the marital asset. Bloomer v. Bloomer, 84 Wis. 2d 124, 267 N.W.2d 235 (1978). A defined-benefit pension with no account balance usually needs an actuary; a 401(k) with a statement balance usually does not.
The practical choice that follows is between dividing the asset and trading it. One spouse can keep the whole retirement account and give up something of equivalent value elsewhere — an offset, which needs no QDRO at all — or the account can actually be split, which does. The offset is simpler and final; it also requires agreeing on a present value today for money that will not be received for decades, and it concentrates the investment risk on one party.
The eighteen-month trap
This is the part worth reading twice, because it is a deadline that does not look like one.
Every plan must establish reasonable written procedures for determining whether an order is qualified, and must notify the participant and each alternate payee when it receives an order and when it has made its determination. § 1056 (d) (3) (G). While that determination is pending, the plan administrator must separately account for the amounts that would have been payable to the alternate payee — the statute calls them the “segregated amounts.” § 1056 (d) (3) (H) (i).
Then the clock. If within eighteen months the order or a modification of it is determined to be qualified, the segregated amounts plus interest go to the alternate payee. § 1056 (d) (3) (H) (ii). But if within that same eighteen months the order is determined not to be qualified, or the question simply is not resolved, the plan must pay the segregated amounts to whoever would have been entitled to them had there been no order at all. § 1056 (d) (3) (H) (iii). And any determination that an order is qualified, made after the eighteen months have closed, “shall be applied prospectively only.” § 1056 (d) (3) (H) (iv). The period runs from the date the first payment would have been required under the order. § 1056 (d) (3) (H) (v).
Prospective only. The benefits that should have been segregated during the delay are gone, and a plan fiduciary that acted properly has its obligation discharged to the extent of what it paid out. § 1056 (d) (3) (I). Nobody sends a reminder. This is why a QDRO drafted but never submitted, or submitted and then left to sit after the plan sends back a rejection letter, is a real loss and not a paperwork annoyance.
On the other side of the ledger, the statute is generous about timing in one respect: an order may require payment to an alternate payee before the participant has separated from service, on or after the date the participant attains or would have attained the “earliest retirement age,” defined as the earlier of the date the participant is entitled to a distribution, or the later of the date the participant attains age 50 and the earliest date the participant could begin receiving benefits upon separation from service. § 1056 (d) (3) (E). Where present value must be determined for that purpose, the interest rate is the one specified in the plan, or five percent if the plan specifies none.
Survivor benefits have to be addressed on purpose
A pension that pays for a lifetime raises a question a percentage split does not answer: whose lifetime, and what happens to the stream if the participant dies first.
Federal law allows the order to solve this, but only if it says so. To the extent provided in a qualified domestic relations order, the former spouse “shall be treated as a surviving spouse” of the participant for purposes of 29 U.S.C. § 1055 — the survivor-annuity provisions — and any current spouse shall not be treated as a spouse for those purposes; and if married for at least one year, the surviving former spouse is treated as meeting the requirements of § 1055 (f). § 1056 (d) (3) (F).
An order that divides the benefit and says nothing about survivorship has allocated a share of payments that may stop. That is a drafting decision, and it should be a conscious one.
The same goes for beneficiary designations generally, which is the third notification § 767.61 (5) (b) requires the judgment to contain: that an instrument executed before the judgment naming the other party as a beneficiary “is not necessarily affected by the judgment,” and that it may be necessary to revise the instrument if a change is desired. The judgment does not update your beneficiary form.
Taxes: who pays, and the penalty exception that has a hole in it
When a plan pays an alternate payee who is the spouse or former spouse of the participant under a QDRO, the alternate payee — not the participant — is treated as the distributee of that payment. 26 U.S.C. § 402 (e) (1) (A). The tax follows the money, which is the result most people assume but which depends on the order being qualified. The alternate payee may also roll the distribution over as if they were the employee. § 402 (e) (1) (B).
There is also relief from the early-distribution penalty. The Internal Revenue Code imposes an additional tax of ten percent of the includible portion of an early distribution from a qualified retirement plan, § 72 (t) (1), but that additional tax does not apply to “any distribution to an alternate payee pursuant to a qualified domestic relations order.” § 72 (t) (2) (C).
Now the hole. Section 72 (t) (3) (A) provides that subparagraph (C) of paragraph (2) — the QDRO exception — “shall not apply to distributions from an individual retirement plan.” The penalty relief exists for employer plans. It does not exist for IRAs.
That matters because IRAs are not divided by QDRO in the first place. An IRA is split under a different provision entirely: the transfer of an individual’s interest in an IRA or individual retirement annuity to a spouse or former spouse under a divorce or separation instrument is not a taxable transfer, and the interest transferred “is to be treated as an individual retirement account of such spouse, and not of such individual.” 26 U.S.C. § 408 (d) (6). Different paperwork, a transfer directed to the custodian rather than an order submitted for qualification — and no QDRO penalty exception waiting on the other side if the receiving spouse then takes the cash out.
None of which is tax advice, and none of it is a prediction about any particular return. It is the reason the tax question belongs in the negotiation rather than after it.
The Wisconsin Retirement System is its own animal
A great many Wisconsin divorces involve a teacher, a municipal employee, a county worker, a state employee, or a police officer or firefighter — which means they involve the Wisconsin Retirement System, and WRS does not work like a private 401(k).
WRS is a governmental plan within the meaning of 26 U.S.C. § 414 (d), and governmental plans get lighter federal treatment: a distribution from a governmental plan is treated as made pursuant to a qualified domestic relations order “if it is made pursuant to a domestic relations order which meets the requirement of clause (i) of paragraph (1) (A)” — that is, the bare requirement of creating or recognizing an alternate payee’s right. § 414 (p) (11). The elaborate federal checklist does not formally bind it.
Wisconsin, however, imposes its own. Benefits under the plans administered by the Department of Employee Trust Funds are exempt from execution, levy, attachment, garnishment, and other legal process, and are not assignable in law or equity, “except as specifically provided in this section.” § 40.08 (1). And the division provision is emphatic: a participant’s accumulated rights and benefits under the Wisconsin Retirement System “shall be divided pursuant to a qualified domestic relations order only if the order provides for a division as specified in this subsection.” § 40.08 (1m) (a).
What the subsection specifies is unusual enough to be worth knowing before the negotiation, not after:
The division is a snapshot taken on the decree date. What is subject to division is the creditable service and the dollar amounts credited to all parts of the participant’s account through the day before the decree date, if the participant is not yet an annuitant; or, if the participant is already receiving an annuity, the present value of the annuity being paid, computed under the actuarial tables then in effect and taking account of any remaining guaranteed payments. § 40.08 (1m) (b) and (c).
Creditable service itself is divided, not just money. The alternate payee’s share is transferred into a separate account in the alternate payee’s own name, together with creditable service. § 40.08 (1m) (e) 1. The participant “shall have no further right, interest or claim” on the portion of creditable service and account balance allocated away. § 40.08 (1m) (d). But no creditable service is manufactured in the process: none may be added to the alternate payee’s account, and the participant does not receive credit for service transferred away. § 40.08 (1m) (g).
The alternate payee becomes a kind of participant, with limits. Control and ownership rights over the separated share are generally the same as those of a participant who had ceased participating employment but had not yet applied for a benefit. § 40.08 (1m) (e) 2. An alternate payee who elects an annuity, though, may elect only among the options that are calculated solely on the basis of the alternate payee’s own age. § 40.08 (1m) (e) 4. The joint-and-survivor thinking that governs a private plan QDRO does not transfer here.
Nobody at ETF is going to chase this for you. The department, its employees, the fund, and the board are immune from liability for acts or omissions under the subsection taken in accordance with a qualified domestic relations order, and “may not be required to take any action or make any notification as part of the exercise of ownership rights granted under this subsection.” § 40.08 (1m) (i).
One more detail with real consequences for older divorces: the subsection applies to qualified domestic relations orders issued on or after January 1, 1982, dividing the benefits of participants whose marriages were terminated by a court on or after that date. § 40.08 (1m) (j). And the state definition of “alternate payee” is its own: a former spouse or domestic partner of a participant named in a qualified domestic relations order as having a right to receive a portion of the participant’s benefits. § 40.02 (2m).
Military retired pay is not divided by QDRO either
If one spouse has military service, the governing statute is the Uniformed Services Former Spouses’ Protection Act, 10 U.S.C. § 1408, and it has its own vocabulary and its own limits.
Three of them matter most. First, the total disposable retired pay payable under all court orders may not exceed fifty percent. § 1408 (e) (1). Second — and this is the rule most often misunderstood — where the former spouse was not married to the member for ten years or more during which the member performed at least ten years of creditable service, payments may not be made by the Secretary concerned on the property-division portion of the order. § 1408 (d) (2). That is a limit on direct payment from the service, not a holding that a shorter marriage gives no interest in the pension; the distinction decides how a settlement must be structured, not whether there is anything to settle.
Third, where the divorce becomes final before the member retires, the amount to be divided is frozen: the total monthly retired pay is computed using the member’s retired pay base and years of service as of the date of the decree, increased by the cost-of-living adjustments that would have occurred between the decree and retirement and those occurring afterward. § 1408 (a) (4) (B). Promotions and pay raises after the divorce do not enlarge the former spouse’s share.
And disability has its own treatment at both the federal and the state level. “Disposable retired pay” excludes amounts deducted as a result of a waiver of retired pay required by law in order to receive compensation under title 5 or title 38. § 1408 (a) (4) (A) (ii). Wisconsin reaches a compatible result from its own direction: a veteran disability pension is to be considered as earned income and not as an asset to be divided between the parties. Leighton v. Leighton, 81 Wis. 2d 620, 261 N.W.2d 457 (1978). A federal pension in lieu of social security, by contrast, must be included in a marital property division. Mack v. Mack, 108 Wis. 2d 604, 323 N.W.2d 153 (Ct. App. 1982).
Cashing out before the filing does not make the asset disappear
Occasionally a spouse decides to liquidate a retirement account while a divorce is coming. Wisconsin has a provision for that. Under § 767.63, any asset with a fair market value of $500 or more that would have been part of the estate of either party, and that was “transferred for inadequate consideration, wasted, given away, or otherwise unaccounted for” by one party within one year before the petition was filed — or during the length of the marriage, whichever is shorter — is rebuttably presumed to be property subject to division under § 767.61, and is subject to the financial-disclosure requirement of § 767.127.
The account is gone; the asset is not. It comes back into the division as a presumed item, and the burden of explaining it falls on the party who spent it.
What to do with all of this
Get the plan’s written QDRO procedures early. Federal law entitles you to them, § 1056 (d) (3) (G) (ii), and they will tell you what the plan actually offers — which is the only way to avoid drafting an order that violates § 1056 (d) (3) (D) (i) by demanding a form of benefit the plan does not have.
Name every plan exactly. The order must specify each plan to which it applies, § 1056 (d) (3) (C) (iv), and a participant with a pension, a 401(k), and a deferred compensation arrangement may need more than one order.
Treat the QDRO as part of the divorce, not as an afterthought to it. The eighteen-month rule in § 1056 (d) (3) (H) punishes delay in a way that cannot be undone later.
Decide survivorship explicitly. Section 1056 (d) (3) (F) makes it available; silence forfeits it.
And if the account is in the Wisconsin Retirement System, build the settlement around the decree-date snapshot and the separate-account mechanics of § 40.08 (1m) from the beginning. An agreement that assumes WRS behaves like a private 401(k) will need to be renegotiated.
Talk to a New Berlin family law attorney
Carson Law Office handles divorce and property division in New Berlin, Waukesha County, Milwaukee, West Allis, Wauwatosa, and the surrounding communities — including retirement division under qualified domestic relations orders, Wisconsin Retirement System divisions under § 40.08 (1m), and military retired pay under 10 U.S.C. § 1408. If your judgment divided a retirement account and nothing has moved since, that is a fixable problem, and it gets harder the longer it waits. Call (262) 860-8932 or email christopher@carsonlawoffice.com. You can also read more about our family law practice, our post on dividing property in a Wisconsin divorce, and our post on marital property agreements, or contact us to arrange a consultation.
Carson Law Office · 15350 West National Avenue, Suite 101, New Berlin, WI 53151 · (262) 860-8932
This article is general information about Wisconsin family law and federal retirement-plan law and is not legal advice, and it is not tax advice. Statutes are amended from time to time, plan documents differ from one another, and every case turns on its own facts. Speak with an attorney about your own case.