QDRO’s

QDRO stands for Qualified Domestic Relations Order and is pronounced “quad-dro.” A domestic relations order is a special court order that is designed to distribute a piece of a pension or retirement account to a former spouse. A qualified domestic relations order is a domestic relations order (“DRO”) that, after it is issued by the court, is qualified by the pension administrator of a private employment (as opposed to government employment) retirement plan. Federal law requires this extra step of qualification to ensure that the order issued by a state divorce court does not conflict with the provisions of that employer’s pension or retirement plan.

You need a QDRO (or a DRO in the case of government retirement benefits) if your divorce settlement or judgment gives you a right to receive some portion of your former spouse’s retirement benefits. Every kind of retirement benefit requires a QDRO, including the traditional monthly-check-until-death pension, called a “defined benefit plan,” as well as every type of tax-deferred retirement account, called a “defined contribution plan,” including 401k, 403b, 457, TSP, and KEOGH plans, among others. You do not need a QDRO to receive a transfer or distribution from your spouse’s IRA account.

Many people make the mistake of assuming that a judgment of divorce or divorce settlement agreement is all they need to get a portion of their former spouse’s retirement benefits. This can be a costly mistake. At the end of a divorce or separation case, many divorce attorneys do not submit the extra paperwork required to obtain a QDRO (or DRO). As a result, upon retirement, the former spouse will receive his (or her) entire pension check (or make withdrawals from his/her retirement account) — including the portion that should have gone to the other “non-employee” spouse — often without penalty, and without the other spouse every knowing anything about it. This can sometimes go on for years undetected. And, once the dollars are paid by the Plan to the retired former spouse, they may be gone for good.  See 9 Reasons Not to Delay in Obtaining Your QDRO, an article by Clifford Petroske, for more information.

The first step, of course, is to make sure that your divorce settlement or judgment contains a provision giving you a right to receive a piece of your spouse’s retirement plan. This provision should be sufficiently detailed to ensure that your QDRO will contain everything you need to get your fair share of the pension or retirement account. If you don’t know all the provisions of the plan (and few people do), don’t be afraid to ask questions of your attorney — as part of the disclosure process in your divorce or settlement negotiation, your attorney can obtain a copy of the summary plan description of the retirement plan. If your spouse does not have a copy, it can be obtained directly from the plan using an appropriate authorization form, or a disclosure subpoena, if necessary.

Armed with information about what your spouse’s retirement plan provides, your attorney should be able to negotiate a comprehensive agreement that gives you a fair share of all retirement benefits offered under your spouse’s plan. These benefits include survivorship rights (in the event that your former spouse dies first, the pension continues coming to the non-employee spouse), disability pension benefits (if the former spouse becomes disabled before retirement, the pension will switch to a disability pension), and pre-retirement death benefits, to name few.

As soon as the divorce agreement is signed and the judgment of divorce is issued, your attorney should prepare and submit a proposed form of the QDRO (or DRO) to the Court for the judge’s signature. The preparation of this proposed order is sometimes delegated to a pension actuary, but caution must be exercised here. Even if your attorney does not draft the order, your attorney should always supervise the process, because the actuary may overlook the exact provisions required by your divorce agreement or judgment. If the wrong QDRO is signed by the Court, it can be expensive (or impossible) to correct the mistake, causing you to lose a portion of the benefits you were entitled to under the divorce agreement.

Once the Court has signed the QDRO (or DRO), your attorney should send it to the plan so that it is in your former spouse’s file at work. This is not only important as a practical matter, since this is the only way the employer’s plan administrator could know about your interest in a retired former spouse’s retirement plan, but it is also required by law for private pension plans. Unless (and until) the plan administrator receives a certified copy of the signed QDRO, it cannot be “qualified” as complying with the plan guidelines. Without qualification, the plan administrator has no power to distribute (or “assign”) some portion of the benefit to you.

The amount you are entitled to receive of your spouse’s benefits after divorce depends upon the length of your marriage and, in the case of a defined benefit pension, on how long he (or she) worked for the employer which provides the benefit during the marriage. Only the marital portion of the pension is divided in a divorce. The courts use a fraction (called the coverture fraction) to describe the marital portion. Often, a spouse will receive 50% of the marital portion of the pension, although this can vary, especially if the case went to trial and the court determined that some other percentage (i.e, 40% or 30%) is an appropriate “equitable” distribution of the pension.

In other words, the portion a spouse actually receives of the retired spouse’s pension is a fraction of a fraction. First, the coverture fraction, which defines the marital portion of the pension, is multiplied by the equitable distribution fraction (usually, but not always, 50%). The result is then multiplied by the monthly pension amount, to provide the amount of the non-employee spouse’s share of the monthly pension.

The marital portion is determined using a formula created by the New York Court of Appeals in a landmark case entitled Majauskas v. Majauskas. Basically, that decision requires all New York divorce courts, when dividing a pension, to use a fraction where the numerator is the number of months that the employee spouse was both married and participating in the pension plan at work, up to the point when the divorce action was started (called the “commencement date”). The denominator is the total number of months that the employee spouse is a participant in the plan, to the point when he (or she) retires. It looks like this:

# of months both married and participating
—————————————————
# of months from start of participation to retirement

This fraction, often called the “Majauskas formula” (or coverture fraction), describes the marital portion of the pension. At a minimum, this fraction must be referenced in the divorce agreement or judgment, and then described in detail in the QDRO. Of course, the denominator will not be known until the employee spouse retires, sometimes many years after the divorce judgment. That’s fine – the pension administrator will just “plug in the numbers” later, upon the employee spouse’s retirement, assuming that the plan has a signed and qualified domestic relations order already on file. Then, the pension administrator pays the non-employee spouse 50% (or other agreed/determined share) of this marital portion, in a separate check each month.

If you have or are able to obtain the monthly (or quarterly) statements from the time of the marriage, you may wish to have an actuary perform an earnings/loss analysis to maximize the date-of-marriage separate property value. This can greatly enhance the separate property component of a retirement account that has appreciated during the marriage. Starting with the first statement after the date of the marriage, and continuing with each statement thereafter to the date of the valuation report, an actuary will determine how the original date of marriage shares (and any shares acquired with those shares) have performed. If those shares have caused the account to increase in value, then this portion of the appreciation of the account is the titled spouse’s separate property and not just the value of the account as it existed on the date of marriage. Our experienced Long Island QDRO attorneys can also help you to know what you need to look for in these monthly statements and where to find them, if necessary.

Unlike the traditional monthly pension, the marital portion of a tax deferred account (401k, 403b, etc), can be determined immediately, even where the employee spouse has not yet retired. Because it is an account, the value is determined simply by looking at an account statement issued at that time the divorce case was commenced. Care should be taken that the non-employee spouse receives her (or his) share with gains and/or losses that the account may experience up the date of distribution, or the non-employee spouse could lose her (or his) share of the account’s appreciation.

Sometimes the tax deferred account existed before the marriage. In these cases, the employee spouse must prove this pre-marriage value in order to keep this portion of the account separate. This can be a real problem, as sometimes plans do not keep records more than 7 years. As with any separate property claim, the person making the claim must prove it — if the employee spouse cannot come up with a statement showing the value of the account on the date the parties got married, he (or she) may well lose the separate property component of the account, causing the entire account balance to be distributed as marital property.

There are two ways that a person who is not yet 59 ½ years old can obtain money from a spouse’s 401k or another deferred comp account without incurring the 10% early withdrawal penalty. One way is to make an election to receive a SEPP (“Substantially Equal Periodic Payment”) distribution. With this election, you receive equal payments, at least once annually, for a minimum of five years. The payments are taxable, so they are subject to the 20% minimum tax withholding, but they are not subject to the 10% early withdrawal penalty.

A second method will provide you with cash out of your spouse’s 401k that is not subject to the 10% early withdrawal penalty. The non-titled spouse can notify the plan administrator that he/she elects to receive a portion of the amount of his/her QDRO transfer as a cash distribution. The plan administrator will then cut a check for the amount requested, less the mandatory 20% withholding, and transfer the balance to a designated IRA or 401k. For help with this aspect of QDRO law, be sure to also contact our QDRO law office in Long Island at Petroske Riezenman & Meyers, P.C.