In many divorces, retirement accounts and investments make up the greatest share of a couple's estate. Yet that nest egg may be an afterthought in the wrangling over the house or child custody or alimony.
Sometimes spouses are dismayed to learn that their pension or 401(k) accounts are not their own. In fact, there is an official vessel (QDRO) for ensuring spouses get their fair share of retirement savings in the aftermath of divorce.
What is a qualified domestic relations order?
A qualified domestic relations order is more commonly known as a QDRO ("quadro"). It is a formal decree for dividing future retirement benefits at the time of divorce. The QDRO must comply with federal laws relating to pensions and retirement plans, as well as state laws governing distribution of marital assets.
Under New Jersey law, retirement assets are subject to equitable distribution. For purposes of divorce, it does not matter who contributed more of their paycheck or who has a larger balance in their retirement accounts. All retirement savings accumulated during the marriage are presumed to be marital property.
- Spouses with approximately equal nest eggs may simply agree to each keep their own retirement accounts. Any imbalance could be equalized by a cash payment or other trade-offs.
- If one spouse has substantially larger retirement savings, a QDRO can apportion some of that nest egg to the other spouse. Spouse A is entitled to X percent of Spouse B's 401(k) as of X date. Drafting the actual document is fairly complicated, especially if the couple has a complex portfolio with multiple qualified plans.
Some attorneys write their own domestic relations orders. Most attorneys use financial professionals who specialize in drafting QDROs, to control legal fees and ensure compliance.
What does a QDRO cover?
The following types of retirement assets must be addressed under a qualified domestic relations order:
-- Defined benefit plans, such as a company-sponsored pension or government pension
-- Defined contribution plans, such as a 401(k) or 403(b) funded through payroll deductions
Individual retirement accounts (IRA), and other investments such as stocks and bonds, are not subject to QDROs. These retirement assets must be divided and transferred separately in property division negotiations.
How does a QDRO work? When is the money distributed?
Under the shared payment method, any disbursements from the retirement plan are split according to the agreed ratio or dollar amount. Under the shared interest method, the plan benefit is essentially split into two separate accounts, per the percentage or amount specified in the QDRO. This allows the recipient to decide when and in what form they receive their portion. An attorney can help you choose the most appropriate method for your situation.
The QDRO must specify a date when the plan benefits will be shared, but it cannot be prior to the participant spouse's earliest retirement date. QDRO disbursements are taxable, but the tax can be deferred by rolling the funds into an IRA within a 60-day grace period.
What can go wrong with a QDRO?
The order can be rejected by the plan administrator as not "qualified" if the amount or percentage is not clearly defined or it otherwise fails to meet statutory requirements. Common mistakes in the drafting and administration of QDROs include:
- Overlooking benefit plans that are not fully vested
- Failing to account for loans against a 401(k)
- Including IRAs or other non-eligible assets
- Failing to exclude retirement savings accumulated before marriage
- Neglecting to declare a date of division (e.g., date of divorce vs. date of retirement)
- Failure to segregate the benefits payable to the plan participant (Spouse A) and the alternate payee (Spouse B or dependents/survivors)
Any of these issues can cost one of the parties thousands of dollars or trigger later litigation. It is important to work with an attorney who understands the financial and legal implications of QDROs and how retirement assets fit into the bigger picture of divorce proceedings.
Source: Division of Retirement Benefits Through QDROs (U.S. Department of Labor)