The Ins and Outs of a QDRO
I recently worked with a divorcing couple that had a 401K retirement account that qualified for equitable distribution. They agreed that it was going to be divided and, because of the plan, they needed to obtain a Qualified Domestic Relations Order (QDRO and typically pronounced “cuadro”). (Not all retirement plans require a QDRO.)
As a bit of background, in 1984 the New York State Court of Appeals (New York’s highest court), in Majauskas v Majauskas, set the standard for dividing retirement plans of all types and nature including but not limited to 401K plans, IRAs, 403B plans, pension plans, profit sharing plans, ands all other retirement compensation plans that qualify for equitable distribution in a divorce.
Majauskas provides that the marital portion is determined by multiplying the owner’s accrued benefit by a fraction. The fraction’s numerator is the number of months of the owner’s accrued service in the Plan earned during the marriage from the date of marriage until the date of the execution of the Separation Agreement. The denominator is the total number of months of the owner’s service credit in the Plan. This can result in a fifty/fifty split, or a negotiated amount higher or lower depending on the other marital assets. Divorcing couples may decide to vary from the Majauskas formula.
In order to divide the assets from certain retirement plans the parties need to obtain a Qualified Domestic Relations Order (QDRO). QDROs are quite complex and it is advisable to have them prepared by an attorney or a financial advisor. The typical cost for the preparation of a QDRO is between $600 and $700. The QDRO orders the administrator of the fund to disburse benefits to both the payee (your former spouse) and to you. A QDRO cannot order the pension to be withdrawn before the period of entitlement, nor can it change the amount of the pension.
The retirement benefit division shall be provided via the QDRO to the court at the time either party seeks a judgment of divorce that incorporates the provisions of the separation and marital settlement agreement. The payee pursuant to the QDRO will commence receiving benefits at the earliest retirement date on which the other person is eligible to commence receiving benefits under the Plan.
Also, the QDRO allows the person receiving an equitable distribution to withdraw his/her share and roll the money over into his or her own IRA. He/she will pay the taxes on this amount.