Divorcing Couples Can Use QDRO to Divide Retirement Assets
Retirement savings represent one of the most significant assets for millions of Americans. For married individuals, a retirement nest egg is included in marital property. Therefore, whether and how to divide a retirement plan is often a critical consideration when couples decide to divorce.
Ex-spouses, children and other dependents may be entitled to a portion of another spouse's 401(k) or related qualified employee retirement plan. How much depends on the specific state, and various other factors.
While the division of marital property is generally governed by state law, assignments of retirement interests must also comply with federal law, namely the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986. Under these laws, retirement benefits may be assigned only if the judgment or order creating or recognizing a spouse’s, former spouse’s, child’s or other dependent’s interest in an individual’s retirement plan constitutes a “qualified domestic relations order,” or QDRO.
A QDRO is essentially a court order that recognizes or assigns the right to an alternate payee to receive all, or a portion of, the benefits payable with respect to a participant under a retirement plan. The state must enter a judgement or decree endorsing or approving the QDRO, and it must also be recognized by the federal government under ERISA. The order carries as much weight as child support, alimony or any other property granted in a divorce.
An alternate payee must meet ERISA’s definition, which includes any spouse, former spouse, child or other dependent of a plan participant who is recognized as having a right to receive benefits payable under a plan with respect to such participant.
The QDRO must contain specific information, including the participant and each alternate payee’s names and addresses; the retirement plan to which it applies; the amount or percentage of the participant's benefits to be paid to each alternate payee; and the number of payments or time period involved. The QDRO becomes qualified when the administrator of the retirement plan confirms that it meets that plan’s requirements.
ERISA also stipulates how to divide certain types of retirement benefits upon divorce. The law only applies to employer-provided retirement benefits, specifically defined benefit plans and defined contribution plans such as 401(k), 403(b), employee stock ownership and profit-sharing plans. There are several methods of determining each party’s share of the plan benefit. One of the primary factors in determining the distributive ratio is whether or not the participant was already enrolled in the retirement plan prior to the marriage.
A spouse or former spouse who receives QDRO benefits from a retirement plan reports the payments received as if he or she were a plan participant. A QDRO distribution that is paid to a child or other dependent is taxed to the plan participant. An individual may be able to roll over all or part of a distribution tax-free. If the employee's spouse or former spouse is receiving QDRO payments, he or she can roll over a plan distribution in the same way as the employee.
Divorce courts can opt not to divide employer-provided retirement plans. For example, when each spouse has his or her own employer-provided retirement plan, the court may award each spouse their own plan or allow one spouse to keep their plan and make up its value to the other spouse by awarding other marital assets.
If you are divorcing, start by asking the administrator of your retirement account for information. The Department of Labor also provides QDRO FAQs to help you understand some of the legal specifics. To ensure that the process is done correctly, work with an experienced attorney who can answer your questions and draft a QDRO on your behalf. Feel free to contact our office at 973-509-8500 x213 or LFarber@LFarberLaw.com for assistance.
The contents of this writing are intended for general information purposes only and should not be construed as legal advice or opinion in any specific facts or circumstances.