Divorce and Pension Funds: How to Protect Your Rights

While there are certain issues in divorce litigation that get a lot of attention such as custody, child support, and maintenance, one of the most significant issues, pension rights, is rarely discussed to the same degree. However, in New York, litigant must take certain crucial steps during the divorce process to ensure that what was once “their” retirement fund doesn’t now become “the ex’s” retirement fund alone.

Under New York law, it is imperative that if either or both of the parties has a retirement fund (pension, 401K) that there be what is called a Qualified Domestic Relations Order, or QDRO, included in the divorce settlement in order to preserve and protect the parties’ rights to the funds contained.

Basically, a QDRO designates which party receives what percentage of each pension or 401K at the time it is to be distributed (typically, upon retirement as normally intended for such accounts). Once a percentage is determined by the Court, both spouses will be required to pay income taxes based upon that percentage, and the ex-spouse is basically listed as a co-beneficiary of that account, along with the person who has been paying into it.

Another option aside from waiting until the funds are distributed as originally planned is for the non-payor spouse to take their share at the time of the divorce (the percentage of the current balance that they are entitled to) and roll it over or move it into their own IRA retirement fund. They will however, still be responsible for taxes to the same extent.

Having a QDRO is extremely important. Without one, the amount of the payor spouse’s pension provided will be treated as a taxable distribution to the payor spouse, who will then be responsible for ALL of the taxes on the funds that go to their ex. Additionally, if this occurs before the payor spouse is 59.5 years old, they can get hit with a 10% penalty.

Without a QDRO, it is extremely difficult to get any share of the retirement plan of an ex, even if you were married for many years.

In order to have a QDRO drafted, the following information is required:

  • The name and address of the payor spouse, also known as the “plan participant.”
  • The name and address of the receiving spouse, also known as the “alternate payee.”
  • Each retirement account (pension, 401K, IRA, etc.) that will be divided in the divorce.
  • The exact amount or percentage of the retirement benefits that the payee spouse is entitled to.
  • The number of payments or length of benefits period covered by the QDRO
  • An explicit specification in writing in the divorce settlement that a QDRO is being established under the New York Domestic Relations Law and Section 414(p) of the Internal Revenue Code.

In more complicated cases, it is important to speak with your attorney regarding having a tax professional go over the parties’ finances and retirement plans to ensure that the QDRO covers every detail, as this will prevent the risk of getting hit with tax penalties.

After the divorce agreement is signed, and the Court issues the Judgment of divorce, the attorney of the payee spouse should submit a proposed QDRO form, which will have already been referred to as existing in the settlement agreement, to the Court for the Judge to sign off on. Although QDROs are not always drafted by the attorney (sometimes they are drafted by a financial professional), the payee spouse’s attorney will review the QDRO to ensure that it matches up with the terms of the divorce settlement. This is because once the QDRO is signed, it is extremely difficult to correct any errors, which could be a very costly mistake. Once the QDRO is signed, it will have to be sent to the payor spouse’s employer so it is with their pension information, otherwise, it is impossible for the plan administrator to provide the payee spouse with their share.

This is because the QDRO is what permits the administrator to release the funds.

Although it may sound complex, a QDRO is an important tool with a straightforward purpose: it states a payee spouse’s share of their ex’s retirement benefits and enables the retirement plan administrator to send that share to the payee spouse when it is time for distribution. Therefore, before you sign any settlement agreement, make sure that not only your present property is fairly distributed, but that your future interests are protected as well.

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