What is a Qualified Domestic Relation Order ("QDRO") and why does it matter in my divorce case?
As with all community property, retirement assets are subject to division upon dissolution. Therefore, that portion of any and all retirement assets accumulated during the course of the marriage must be divided.
There are three primary categories of retirement assets – IRA (Individual Retirement Account), 401(k) and pension assets. While the first of these assets can be divided by transferring all or a portion of the IRA account to an IRA account in the name of the other party, this is not so for pension and/or 401(k) assets. When a pension or 401(k) account is divided, a significant taxable event may be created. This event can be avoided (upon dissolution) with an appropriately drafted qualified domestic relation order (QDRO) which avoids any tax issues.
QDRO's Avoid Taxable Events
QDROs are typically prepared by lawyers with a particular and specialized expertise. The QDRO preparer will typically be retained jointly by the parties and prepare a stipulation and draft order dividing the assets (according to the ratio or time determined in the dissolution proceeding) and will provide same to the parties for their signature. Once the correct stipulation has been prepared and signed, it will be submitted to the judge who will then adopt the form of order provided by the QDRO preparer. Once signed by the judge, the order becomes a formal order of the court and the document is then provided to the pension or 401(k) plan administrator who will divide the retirement assets in accordance with the court's order. The result of the division will be a tax free division of the retirement asset. The QDRO preparer may also make the necessary calculations to determine gains and losses from the date of the agreement until the date of division.
Complexity in Splitting Retirement Accounts
Only the community portion of a retirement asset is divided upon dissolution. The difficulty arises when a party has worked with the same employer (or participated in the same retirement plan) for a period prior to and/or after the date of the termination of the community. Therefore, in order to determine the community portion of the retirement asset, we calculate the total number of months during which the participant has contributed to the retirement account and then calculate the number of months during the marriage in which he participated in the retirement plan. We then use those numbers to determine an appropriate percentage for the community. By way of example: Assuming Wife worked for an employer (which has a 401(k) plan) for 10 years or 120 months and further assuming that 8 years or 96 months of that period occurred during the marriage, the calculation is as follows: 96/120 will be the community portion/ratio of the retirement asset. Thus, 80% of the retirement account belongs to the community and each party is entitled to one-half (½)of that benefit, or 40% of the value. Obviously, the remaining 20% is Wife's separate property. Therefore, Husband will receive 40% of the value while Wife is entitled to 60% - her one half of the community portion (40%) and her separate property portion (30%).
About the author: Mervyn Braude is a family law attorney at the Phoenix law firm of Jaburg & Wilk PC. He is a certified family law specialist by the State Bar of Arizona. Mervyn is a 2010 Southwest Super Lawyer.
This article is not intended to provide legal advice and only relates to Arizona law. It does not consider the scope of laws in states other than Arizona. Always consult an attorney for legal advice for your particular situation.