What Needs To Be Included In A QDRO?

Published by July 14, 2024 Category: Divorce

What to Include in Your QDRO

Divorce attorneys note that New Jersey considers retirement plans, such as pensions, 401(k)s and IRAs, to be marital property under certain circumstances and thus subject to division. A QDRO is a legal contract included in a divorce agreement that provides the legal mechanism through which the court can enforce this. QDROs must meet many standards for what they can and cannot include before a judge will officialize the agreement. It should be noted that a QDRO is in most cases not necessary to divide an individual retirement account, however.

What Is a QDRO?

A qualified domestic relations order (QDRO) is a legal document that a court can issue. Judges typically issue these decrees as part of a divorce agreement. State law recognizes retirement plans as marital assets and assets that you can transfer to a beneficiary. A QDRO is a legal vehicle through which the courts can force a retirement plan participant and sponsor to comply. The purpose of a QDRO is to:

  • Facilitate the fair distribution of marital assets or benefits
  • Preserve future financial security
  • Comply with the Employee Retirement Income Security Act
  • Preserve survivor benefits
  • Avoid tax penalties

How Does a QDRO Work?

A QDRO goes through a process before a judge will sign off on it. All relevant parties, including the plan sponsor, must approve it. Once the divorce agreement is finalized, the plan will make a distribution per the requirements of the decree.

Under federal tax law, the former spouse must report the benefits as if they were the plan owner. That person has two options. They can roll the QDRO distribution over to another retirement plan thereby avoiding taxes presently. They can also choose to report the benefit on their tax return for that year. The actual plan participant is not responsible for the taxes.

The rules are different when the distribution goes to a child or other dependent. The primary plan participant is responsible for the taxes for the tax year in which they were awarded.

What You Must Include

There are three core groups of information that you must include in order for a QDRO to be valid. These are:

  • Full identification of all relevant parties
  • Comprehensive description of benefits
  • Purpose and direction of the distribution

Identification of Parties

The order must identify the:

  • Retirement plan
  • Plan participant
  • Alternate payee

The goal here is to provide anyone acting on the order in an official capacity all the information they need. The QDRO should identify the employer and, if applicable, distinguish this plan from its others. There should be contract information for the company that manages the plan. There may be additional steps required if there are data privacy concerns for either the participant or payee.

Benefit Description

This part of the order must include the:

  • Benefit amount or formula
  • Date of distribution
  • Details on investment gains and losses

The benefit amount must not exceed what the plan provides for. It’s much more common to use a percentage, such as 50%, rather than an exact figure. The date of distribution can be immediately, or it can be at a later time, such as the former spouse’s or participant’s retirement date. If distribution is at a later date, the QDRO must specify how the parties share gains and losses.

Purpose and Direction

The QDRO must specify through which legal right or rights it exists. Those can include:

  • Marital property rights
  • Marital support
  • Child support

The direction of payment is often obvious. In the case of marital property rights, the plan would distribute the benefits to the spouse. An example of when it’s not obvious would be distributing payment to family services on the behalf of a child.

What You Cannot Include

There are also inclusions that can disqualify an order. Perhaps a judge will reject it out of hand or the retirement plan sponsor or other relevant institution will refuse it. Such inclusions are:

  • Excessive benefit amounts
  • Inconsistencies with the parameters of the plan
  • Conflict with an existing QDRO

Plan Provision Inconsistencies

A QDRO must adhere to the structure and parameters of the plan as it was created. As an example, a QDRO could not force a plan to distribute benefits to a spouse as an annuity if that was not also an option for the participant.

Benefit Amount

Consider a scenario in which a participant has $50,000 in their account. The QDRO could not specify that the spouse would receive $100,000 even if the distribution was at a later date. This is why percentages are more common. If the QDRO dictated 50%, the spouse would get $25,000 today. If it grew to $200,000, then they would get the $100,000 at the date of distribution. If it shrunk to $40,000, they would only get $20,000. This is why you should also specify how the QDRO handles gains and losses.

QDRO Conflicts

Under Department of Labor regulations, a new QDRO cannot conflict with an existing QDRO. In other words, any benefits assigned to an alternate payee by a QDRO are not accessible through another QDRO. There are exceptions. If an alternate payee passes before receiving the benefits, they may be available to another alternate payee, but that would require Department of Labor approval.

Processing

A QDRO must describe all procedures, including review, communication and distribution. Once a plan sponsor has received a QDRO, they should freeze all plan assets until:

  • Date of distribution
  • The QDRO has been denied
  • Receiving a court order ending the freeze
  • 18 months after the freeze

What You Should Include

It’s important that a QDRO define your rights explicitly. Avoid assumptions. Two key areas where they are potentially problematic are:

  • Taxes
  • Survivor benefits

Taxes

If the QDRO does not explicitly describe how taxes are dealt with, the order will handle them as described earlier. It is legal for the parties involved to renegotiate their tax liabilities, which will then be enforced through the QDRO. While it is legal, there are many rules concerning this. There is precedent that you cannot simply shift tax responsibility to the participant. You could, however, decide on a principal amount that the participant would pay as an anticipated tax liability.

Survivor Benefits

If the alternate payee is to receive the distribution at a later date, they will upon the participant’s death as well. The participant should pay particular attention to what happens to the QDRO if the alternate payee dies. Many participants assume that their obligation has concluded. This is not necessarily the case. The alternate may have assigned those benefits to their own beneficiary via a will.

Legal Assistance With Your QDRO

If you are divorcing and do or may need a QDRO, consult with a divorce attorney experienced with such contracts. If you are in New Jersey, the Law Office of Kelly Berton Rocco would like to provide the guidance you need. Our law firm has over 35 years of experience navigating complex aspects of divorce proceedings. To set up a consultation, call our Hackensack office at 201-343-0078, or contact us online.