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At its core, a divorce is a legal process that not only ends a marriage but also divides shared property. When sorting out the details of a final divorce judgment, the court will consider financial assets and liabilities that have or will continue to accumulate before, during, and after your marriage. This takes into account more than just your combined earnings and debts. Did you know your pension will also be considered, even if your retirement is years or even decades away? Retirement funds are considered marital property in New Jersey, and they can be divided in divorce by a specific set of procedures called the QDRO process.
What is a QDRO? Defining the Document
A spouse who wants to receive a portion of the ex-spouse’s retirement funds must request a qualified domestic relations order (or QDRO, often pronounced as “quadro”) that must be submitted to the retirement plan administrator, so it’s important to know – what is a QDRO?
A QDRO is a legal document issued by the court that serves to clarify the division of marital property, specifically retirement funds, during a divorce. If one applies in your divorce case, you or your spouse may be forfeiting a portion of your retirement benefits, so it’s important to understand and plan for that contingency.
A retirement plan administrator cannot legally transfer any portion of one person’s retirement to another person without a court order. If either spouse has an eligible retirement plan, a QDRO will specify a proportion of those assets to be paid to the “alternate payee.” An alternate payee can only be a spouse, a former spouse, a child, or other dependent of the participant.
A QDRO applies to retirement plans covered by the federal Employee Retirement Income Security Act (ERISA), such as 401(k)s, 403(b)s, and other types of defined benefit or defined contribution retirement plans.
Why is Understanding the QDRO Process So Important?
Divorce is a life-changing event, ranking high in the amount of emotional and financial stress imposed on you and your family. You will be making critical decisions about many parts of life you’ve shared with your spouse – your home, providing stability for your children, perhaps even dividing a business. As you navigate this challenging process, relying on the advice of experienced legal and financial experts can alleviate some of your stress, giving you a better picture of your future financial stability.
Qualified domestic relations orders can create equity for families when financial resources will be divided by a divorce. A QDRO allows retirement assets to be transferred to a spouse, child, or former spouse as part of the divorce. Within the context of asset distribution during a divorce, a QDRO is issued by the court to divide marital assets, such as retirement benefits, and to ensure fair distribution of marital property. A qualified QDRO attorney provides the expertise necessary to complete this process, one that can be complicated and requires precise attention to detail.
The Complete QDRO Process: Step-by-Step
Your divorce attorney will take the lead in completing the QDRO process for you, but here’s an overview of how it works.
Step 1. Drafting the Order
Your attorney will work with your spouse’s attorney to negotiate the terms of the QDRO. This negotiation will be part of the asset distribution process. When an amount is agreed upon, your attorney will prepare a draft of the QDRO that meets New Jersey requirements, and then ask your spouse’s attorney to review it for accuracy.
You should know that any proportion of your spouse’s retirement benefits you are eligible to receive may be leveraged against other assets you might otherwise gain in the negotiation. In other words, it may be possible to negotiate a deal that avoids the QDRO process altogether, essentially swapping another asset that has the same value as the pension value that an ex-spouse would receive. The purpose of this type of agreement is to allow the spouse to receive their share of a pension without having to wait until the employee is vested into the retirement account. For example, a wife who wishes to keep their house may waive her right to an equivalent value of her ex-husband’s pension. It’s essential to have the advice of an experienced divorce lawyer to look out for your best financial interests while negotiating this type of agreement as part of your divorce.
Step 2. Pre-Approval by the Plan Administrator
For those who wish to proceed in the QDRO process, the next step is to get pre-approval from the retirement plan administrator or financial institution. This is necessary to ensure that the order meets the institution’s specific requirements. Your attorney may then need to make revisions to the QDRO based on feedback from that review.
Step 3. Judicial Approval and Certification
Next, your attorney will present the order to the judge that is handling your divorce case. For a QDRO to be considered legally valid, a judge must sign it. Alternatively, the judge could possibly return the order for further negotiation before agreeing to sign it.
Step 4. Final Submission and Segregation of Assets
A certified copy of the QDRO must be sent to the retirement plan administrator for implementation once your divorce is final. The pension payments will then be divided according to the precise terms of the agreement.
6 More Common Questions Answered About the QDRO Process
A QDRO is a technical document requiring precise language, and it can have a profound impact on your financial footing post-divorce. You should rely on your divorce attorney’s guidance during the QDRO process, but the following information should help you better understand the purpose of these documents and their implementation.
1. How is a QDRO Paid Out to the Alternate Payee?
The QDRO will direct the retirement plan administrator or financial institution to disburse a specified amount directly to the recipient spouse as cash – usually in the form of a monthly check, direct deposit or wire transfer. In some cases, however, the funds could otherwise be directed to pay for alimony or child support. According to federal guidelines, if an alternate payee is a minor or is legally incompetent, the QDRO can require payment to someone with legal responsibility for the alternate payee.
2. Is There a Statute of Limitations on a QDRO?
There is no specific statute of limitations for filing a QDRO for a New Jersey divorce. A delay in filing, however, can likewise mean a delay in collecting benefits to which you are entitled.
You also risk forfeiting your share of retirement funds if any of the following occur before the QDRO is filed:
- Your spouse retires;
- Your spouse remarries;
- Your spouse is fired by the employer providing the pension benefits, or quits the job;
- Your spouse withdraws funds before retirement, or uses the account to secure a loan; or
- The death of your spouse.
So it’s best to consult with your divorce attorney to make sure there is some urgency about the timely preparation of the QDRO, which will be to your benefit.
3. Do You Need a QDRO Attorney?
In a New Jersey divorce, when a spouse is entitled to receive part of all of their partner’s pension, the divorce attorney will prepare the qualified domestic relations order and present it for the judge to sign. The New Jersey guidelines for QDROs are extensive, and each type of retirement plan has specific rules for filing and implementation. While it’s possible to attempt the QDRO process on your own, advice from a divorce attorney is always recommended so you can avoid costly delays, mistakes or tax consequences.
4. Does a QDRO Cover IRAs or Military Pensions?
No, IRAs, military pensions, government pensions, deferred annuities, and deferred contributions are not eligible to be divided by a QDRO in New Jersey.
Retirement plans that can be divided by a QDRO include 401(k), 403 (b), 457 retirement plans and tax-sheltered annuities. Eligible state-administered pensions include:
- Public Employees’ Retirement System (PERS);
- Teachers’ Pension and Annuity Fund (TPAF);
- Police and Firemen’s Retirement System (PFRS);
- State Police Retirement System (SPRS);
- Judicial Retirement System (JRS);
- Alternate Benefit Program (ABP);
- Defined Contribution Retirement Program (DCRP);
- New Jersey State Employees’ Deferred Compensation Plan (NJSEDCP); and Supplemental Annuity Collective Trust (SACT).
5. Who Pays the Fees Associated with Preparing the QDRO?
Typically, both clients split the cost for preparing the qualified domestic relations order. Your divorce attorney may choose to outsource to a third-party QDRO preparation expert who will draft a court-ready document for your attorney to review. In some cases, this can result in some cost-savings for the clients.
6. Can a QDRO Be Filed After the Divorce is Final?
Yes, according to the U.S. Department of Labor, there is no requirement that a QDRO is filed before a divorce is final. A QDRO may be included as part of a divorce decree or court-approved property settlement, or issued as a separate order.
However, since life circumstances can change quickly and put you at risk of losing your right to file, the sooner a QDRO is filed, the better.
Secure Your Retirement with a NJ QDRO Attorney
Qualified domestic relations orders can be complex legal documents, potentially impacting both the short-term tax implications and long-term financial forecast for you and your family. It’s important to consult with a divorce lawyer familiar with the QDRO process, New Jersey domestic relations laws, and federal ERISA guidelines, to ensure that your rights are protected. At DeTorres and DeGeorge Family Law, our divorce lawyers will prioritize your economic needs and fight for your pension rights after divorce. Our goal is to help you obtain all of the property you deserve in a fair and equitable divorce. Contact us today to schedule a consultation.
