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What is a Qualified Domestic Relations Order in a New York Divorce?
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New York Qualified Domestic Relations Order (QDRO) Lawyer
What is a Qualified Domestic Relations Order or QDRO in New York?
A Qualified Domestic Relations Order (QDRO) is a court order often entered as part of a divorce. The QDRO serves to divides various assets (usually retirement assets) as part of equitable distribution based on the terms of the Judgment of Divorce. Upon being accepted by the plan administrator, the QDRO will establish each party’s entitlements and account ownership with the retirement plan in order to provide the each party with their respective share of the asset or pension plan. In the context of a New York divorce, a QDRO is an essential tool for ensuring that retirement benefits are properly divided according to the terms of the divorce agreement.
How Does a QDRO Determine Each Party’s Share?
The terms of QDRO must effectively mirror the distributions and entitlements established when the divorce was resolved either by way of decision after trial or stipulation of settlement. Those terms are then set forth in a Judgment of Divorce, upon which the QDRO will be based. Any inconsistency between the QDRO and the Judgment of Divorce will likely result in the QDRO being rejected by the plan administrator, with immeasurable delays and headaches likely resulting.
Accounts a QDRO is Used For
A QDRO is specifically used for retirement plans that are covered by the Employee Retirement Income Security Act (ERISA). These include:
- Defined Contribution Plans such as a 401(k) plan or a 403(b) plan. A 401(k) plan is an employer-sponsored defined-contribution plan where employees can make contributions from their paycheck either before or after-tax, depending on the options offered in the plan. A 403(b) plan is similar to 401(k) plan, but it is available to employees of governments, not-for-profit organizations, etc.
- Defined Benefit Plans / Pension Plans. A pension is a defined benefit plan that provide a specific payout at retirement, based on the employee’s years of service and salary.
- Profit-Sharing Plans: Plans where employees receive a share of the company’s profits.
- Annuities. Annuities, including a TIAA CREF account, are distributed by way of a QDRO.
A QDRO is generally not used or applicable to Individual Retirement Accounts (IRAs) or certain government retirement plans such as the Federal Thrift Savings Plan (TSP), though similar orders can be used for these types of plans. Additional information on various types of retirement plans can be obtained from the Department of Labor.
Options in a QDRO: Survivor Benefits and Pop-Ups
When drafting a QDRO, there are various options to consider, particularly regarding survivor benefits and pop-ups:
QDRO Survivor Benefits
- Survivor Benefits. Survivor benefits are a key consideration in any QDRO involving pension plans, designed to ensure that if the plan participant dies before or after retirement, the alternate payee (the ex-spouse) continues to receive benefits.
- Qualified Joint and Survivor Annuity (QJSA). This is a common form of survivor benefit in which the surviving spouse receives a portion of the retirement benefits for their lifetime.
- Qualified Pre-Retirement Survivor Annuity (QPSA). This benefit provides payments to the surviving spouse if the plan participant dies before retirement.
The any settlement agreement or judicial decision as well as the QDRO must specify the type of survivor benefit and the percentage that will go to the alternate payee. Failure to properly address survivor benefits will generally result in the loss of these benefits to the ex-spouse upon the participant’s death.
QDRO Pop-Up Options
Some pension plans offer a “pop-up” feature. This means if the alternate payee predeceases the participant, the participant’s benefits will “pop-up” to the higher single-life benefit amount. This option can be advantageous but might come with higher initial costs, reducing the monthly benefit amount.
The QDRO Process
The process of obtaining a QDRO in New York involves several steps:
- Drafting the QDRO. The QDRO must be drafted carefully to comply with both the plan’s rules and the legal requirements. It should include:
- Identifying information for both parties and the plan.
- The amount or percentage of the benefit to be paid to the alternate payee. The number of payments or period to which the order applies.
- How the benefits should be calculated (e.g., immediate offset method or deferred division method).
- Pre-Approval. Before submitting the QDRO to the court, it is often advisable (and indeed, sometimes required) to get pre-approval from the plan administrator. This step ensures that the order meets the plan’s requirements and can be implemented without issues. The plan administrator will review the draft and either approve it or provide feedback for necessary revisions. It is essential to note that under federal law, the plan administrator can reject any QDRO that does not comport with the plan rules.
- Court Approval. Once a QDRO is pre-approved by the plan administrator, the QDRO is submitted to the court for the judge’s signature. The court’s approval makes the QDRO a legally binding order.
- Submission to Plan Administrator. After the court signs the QDRO, it must be submitted to the plan administrator for implementation. The administrator will then divide the retirement benefits according to the terms of the QDRO.
Tax Consequences of a QDRO
The QDRO will serve to create specific entitlements and sometimes specific accounts for each individual party. To that end, when an account is distributed by way of a QDRO, it is not a taxable event for either party and it is not deemed to be an account “withdrawal.” The plan participant suffers no immediate tax consequences at that time. Each party’s share of the asset may grow (or lose value) based on market forces and such gains or losses will retain the same tax consequences as they would have if the account had never been distributed or a QDRO issued.
Later, when such funds are then paid to the recipient spouse or otherwise withdrawn by that party, those funds only then become taxable. By way of example, if a 401(k) is distributed by way of a QDRO, there are no taxes due at that time by either party as a result of that transaction. Thereafter, when either party withdraws from their individual account, such withdrawals are taxable to the individual recipient.
Consequences of Not Filing a QDRO
If a party does not file a QDRO, several adverse outcomes can follow:
- Loss of Benefits: Without a QDRO, the non-participant spouse (alternate payee) will not receive their share of the retirement benefits. This can significantly impact their financial situation, especially if they were relying on these benefits for retirement income.
- Death of Participant: If the participant dies before the QDRO is filed, the alternate payee may lose the right to any survivor benefits unless specifically stated otherwise in the divorce decree.
- Remarriage and New Beneficiaries: The participant may remarry and designate a new beneficiary, which could exclude the ex-spouse from receiving any portion of the retirement benefits.
- Legal Complications: Failing to file a QDRO can lead to additional legal battles. The alternate payee may need to return to court to enforce the terms of the divorce decree, leading to more legal fees and potential delays.
- Plan Limitations: Some retirement plans have specific deadlines for filing QDROs. Missing these deadlines can make it difficult or impossible to divide the retirement benefits later.
Importance of Counsel in Obtaining a QDRO
Given the complexity and importance of QDROs in dividing retirement assets during a divorce, it is crucial for both parties to seek experienced legal counsel. An attorney with expertise in QDROs and retirement benefits can ensure that the order is drafted correctly, complies with all legal and plan requirements, and that the interests of the alternate payee are protected. As Long Island divorce attorneys, we have experience in drafting agreements and resolving divorces to provide our clients with the greatest protections and benefits.
New York QDRO FAQ
The U.S. Department of Labor, Employee Benefits Security Administration FAQ provides: A “qualified domestic relation order” (QDRO) is a domestic relations order that creates or recognizes the existence of an “alternate payee’s” right to receive, or assigns to an alternate payee the right to receive, all or a portion of the benefits payable with respect to a participant under a retirement plan, and that includes certain information and meets certain other requirements.” Its purpose is to distribute specific retirement accounts based on the terms of an underlying court order.
A divorce decree (commonly known as a Judgment of Divorce or simply, JOD) is the document issued by a court formally dissolving the marriage of the parties. In New York, the Judgment of Divorce will explicitly state each party’s entitlement to certain distributions of assets or, at minimum, incorporate another document containing such terms. On the other hand, a QDRO is a subsequent document that is intended to facilitate the distribution of accounts and directed at the account plan administrator.
The customary approach in dividing a 401(k) plan is to do so by way of QDRO as that provides the cleanest and generally most precise methodology in providing each party with their respective entitlement. In some cases, parties can potentially avoid the use of a QDRO if they want to address the account in some other fashion including executing a cash buyout, trading the asset for some other value or simply waiving any such distribution.
There is no time limit or date by which a QDRO must be filed in New York State. While it is not uncommon for parties to wait months or years to address a QDRO, it is the best practice to begin work on the QDRO immediately upon receipt of a decision after trial or after execution of a stipulation of settlement.
Generally, the alternate-payee (the non-titled party to whom the account is being distributed) will have the QDRO drafted and will ensure that it is properly advanced.
Pursuant to the Internal Revenue Code, a QDRO can be utilized to pay support obligations including maintenance (alimony) or child support. Using a QDRO for such purposes is exceedingly rare and, generally, will only be done if the payor is in substantial arrears.
Additional QDRO Resources
- New York Office of New York State Comptroller – Determining the Ex-spouse’s Share
- U.S. Department of Labor – FAQs on Qualified Domestic Relations Orders
- U.S. Department of Labor – QDROs Handbook – Division of Retirement Benefits through Qualified Domestic Relations Orders
New York QDRO Attorney
A QDRO is a vital legal instrument in the division of retirement assets in a New York divorce. It requires careful drafting, consideration of various benefit options, and adherence to a detailed process to ensure that both parties receive their entitled share of the retirement benefits. Neglecting to file a QDRO can have significant negative consequences, making it essential to address this aspect thoroughly during divorce proceedings. At the Law Office of Louis L. Sternberg, we are dedicated to helping our Long Island clients ensure that the proper QDRO is entered promptly, protecting your rights. Contact us today to schedule your free initial consultation regarding equitable distribution and a QDRO. Call us now at 631-600-3295.