The Quagmire of (Q)DROs

Among the most misunderstood aspects of legal separation and divorce is the process of dividing retirement assets.

Not only are the concepts foreign to most couples, but the terminology is often perplexing and unduly complicated. This passage gives a glimpse of information–and a stern cautionary warning–that may be vital to parties going through a dissolution of their marriage when retirement accounts or benefits are being divided. For “qualified plans” (as they are known under federal law), such as most 401(k), pension and employer profit-sharing arrangements, a court Order known as a QDRO (short for “Qualified Domestic Relations Order”) must be signed by a judge and served on the plan administrator or trustee at the time of or after the divorce. Sometimes the Order is simply called a DRO (“Domestic Relations Order”) when it’s a government plan or other non-qualified type of retirement account.  The owner of the account is the “Participant” and the other spouse is known as the “Alternate Payee”.

Just like houses, cars, bank accounts, investments, and similar assets earned or acquired during the marriage, retirement plan accounts constitute “marital property” under New York law and must be divided “fairly and equitably” depending on the circumstances of the couple.  Sometimes this means 50/50, or a different percentage, or a flat dollar amount, or sometimes even a complete waiver of any benefits.  The specific terms of how a couple elects to divide qualified retirement assets will be set forth in the comprehensive Opting-Out, Settlement or Separation Agreement.  But, but, but . . . language in a valid Agreement is NOT sufficient alone to accomplish the tax-free transfer of retirement assets from one spouse to the other. A QDRO or DRO absolutely must be executed by the court and processed according to Plan requirements before the Alternate Payee will receive anything. And, critical in the process is that QDROs cannot contain benefits to the Alternate Payee that aren’t expressly set forth in the previously signed/notarized Agreement of the parties.

Perhaps the most significant case on point was decided by the highest court in New York back in 2002. Nonetheless, there still remains both confusion about and unawareness over the importance of proper drafting and coordination of Settlement Agreements and QDROs. Known as McCoy v. Fineman, the case makes it patently clear that benefits to an Alternate Payee have to be explicitly set forth in the Settlement Agreement; and if benefits are omitted or merely overlooked, then the Alternate Payee is not entitled to those retirement advantages.  In the McCoy case this meant the non-working spouse was not entitled to preretirement death benefits from her ex-husband’s qualified plan.

Since retirement plans are oftentimes (maybe even mostly) the most significant assets in a marriage, it is vital that couples and lawyers take painstaking efforts to be certain that divorce settlements and DROs/QDROs manifest the parties’ intent fully and unambiguously. Lax drafting and/or incomplete comprehension in this complex area of the law can lead to unexpected and disappointing results as happened in the McCoy law suit.