Does a 401(k) Distribution in Divorce Require a QDRO?

by admin on January 31, 2012

in Assets and Liabilities -- Divorce Mediation Long Island, Your Pension and your Business--Divorce Mediation Long Island

Qualified Domestic Relations Orders (QDRO) are expensive; they are required in order to transfer pension assets in a divorce without incurring the 10% penalty for early withdrawal. But many financial institutions will transfer a 401(k) without a QDRO, and just have you sign a simple form instead. Seems like a good idea — look at all the money you save.  Is there a catch?

Don’t Incur A Needless Tax Penalty in Divorce.

Unfortunately, there is. If the QDRO is not properly prepared and signed by a judge, you will be subject to the federal income tax 10% early withdrawal penalty. You could end up being subject to a tax on monies that you have already transferred to your spouse pursuant to the divorce settlement.

How to Avoid a Needless Tax Penalty in Divorce.

To be valid the QDRO must meet two criteria: it must be correctly created and it must be correctly verified.

To be correctly created it must have been signed by a Judge and it must contain the following information:

1. your name and most recent mailing address.

2. the name and address of your spouse (known as the alternate payee).

3. the amount or percentage of the account that is to be paid to your spouse.

4. how the amount or percentage that is to be paid to your spouse is to be determined or calculated.

5. the number of payments or the period of time to which the QDRO applies.

6. the name of the Plan to which the QDRO applies.

The second thing that must be done is the QDRO must be validated, that is, the Plan must determine that it is legally valid and what they must do about it. That is often done in a preapproval process, before the QDRO is submitted for signature to the Court. One way or another, however, the Plan must do the following:

1. notify you and the alternate payee that it has received the QDRO and explain to you how the Plan will determine its validity.

2. determine within a period of no more than 18 months whether the QDRO is valid or not; this is almost always done through a pre-approval process.

3. account for any payments to be made to the alternate payee during the evaluation period.

4. notify you and the alternate payee whether the QDRO is valid or not.

It can be an expensive process, particularly if your divorce involves a number of pension assets that must be transferred. Each QDRO can run about $1,000.

Don’t let convenience get the better of you. Do it right, or you pay a great deal in unnecessary taxes.

 

 

 

 

 

 

Divorce Medation Long Island — Pensions and Divorce: New York State Teacher’s Retirement System

by admin on August 8, 2011

in Assets and Liabilities -- Divorce Mediation Long Island, Avoiding Court --Divorce Mediation Long Island, Your Pension and your Business--Divorce Mediation Long Island

Your Spouse’s New York State Teacher’s Retirement System Pension is Marital Property

If your spouse was employed by a New York State public school system and earned any part of a pension during the marriage you are probably entitled to share in that pension.

How Much Is Your Share?

Your share is based on a formula, called the “Majauskas Formula”, named after the name of the court case that established the rule. You are what is called the “alternate payee.”

The alternate payee is entitled to a amount that is approximately one half of the amount earned during the marriage.

The actual formula is as follows:

1. number of months of marriage during which your spouse earned a  pension.

2. divided by the number of months total during which your spouse earned a pension.

3. times 1/2.

4. times the yearly benefit your spouse is entitled to receive.

As an example: You have been married 20 years and your spouse worked as a teacher for the entire marriage and ten years before that, for a total of 30 years of retirement benefits accrual. Your spouse’s total retirement benefit is $45,000 per year.

You would receive the following:

total months of marriage: 20 years x 12 months = 240 months

total months of service: 30 years x 12 months = 360 months

percentage of retirement benefit that is marital: 240/360 = 67%

You receive 1/2 of 67% of $45,000 = $15,075.

Do I Have to Share My Pension With My Ex-Spouse?

Of course, you are both free to make another deal on this issue; often people swap off different assets in the course of negotiating a divorce settlement.

How Do I Make Sure I Get My Share?

The New York State Teachers Retirement System is exempt from the Employee Retirement Income Security Act (ERISA), which requires a Qualified Domestic Relations Order signed by a Court to distribute your share to you, but does accept a Domestic Relations Order signed by a court, which is essentially the same thing.

What Other Retirement Benefits Am I Entitled To?

In addition to distributing a monthly retirement payment between the two of you, a Domestic Relations Order can also divide a disability retirement allowance, provide a share of certain death benefits to the alternate payee, and require the election of a specific benefit payment at retirement.

The New York State Teacher’s Retirement System will honor a Domestic Relations Order directing the payment to the alternate payee of part of the monthly payment of a  pension already in payment status.

Can Divorce Mediation Long Island Make Sure I Get My Share or Do I Have to Go To Court?

It is crucial that the details of the Plan, including the first date your spouse became eligible for benefits under the Plan, the date upon  which your eligibility will be determined, and other details, be laid out in your final divorce agreement.

We have a lot of experience with these issues and make sure that they are covered in any divorce that we mediate.

 

 

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