In New Jersey, like all other states, a QDRO stands for Qualified Domestic Relations Order. QDROs are used in divorce to give all or portion of a retirement account to the spouse of the person who earned the plan through employment. QDROs are special orders signed by a judge that instruct the retirement plan to make a distribution to the spouse. To divide certain types of retirement plans, you must use a QDRO. Other types of plans can be divided using ordinary orders.
When discussing QDROs, the term "participant spouse" is used to describe the spouse who earned the retirement account through employment, and the "nonparticipant spouse" is the other spouse who, by the terms of their divorce, will receive all or a portion of the account.
New Jersey law considers retirement accounts to be marital property to be divided between spouses at divorce. If, under the terms of the divorce, the nonparticipant spouse should receive all or a portion of a retirement account, an attorney will prepare a QDRO for a judge to sign. The QDRO will state what portion of the account the nonparticipant spouse is entitled to receive and it will direct the financial institution that manages the account – called the "plan administrator" -- to disperse that portion to the nonparticipant spouse. There is no tax penalty for this distribution. The plan administrator provides the funds to the nonparticipant spouse as cash – usually through a check or wire transfer.
Before the QDRO attorney sends the order to the judge, he or she may have it "prequalified" by the financial institution. If so, after writing the QDRO, the attorney sends it to the plan administrator to assure that it meets the institution's requirements. Then, after this prequalification, the attorney sends the order to the court for approval. After the judge signs the order, the attorney sends the signed order back to the plan administrator as the official request to distribute the funds. As you might imagine, this entire process can take many months.
You can use a QDRO to divide only certain types of retirement plans. These generally fall into two categories: defined benefit plans and defined contribution plans.
Defined benefit plans. Under defined benefit plans – also called pensions—an employer provides a plan that pays an employee a fixed amount of money during retirement. The employer usually provides this plan as part of the of the employee's compensation package. Typically, the plan pays the retired employee through a monthly check and, depending on the terms of the plan, payments may continue until death.
Defined contribution plans. Under defined contribution plans, the employee and the employer contribute funds to a plan and the value grows over time. The employee has access to the funds during retirement. Penalties may apply for early withdrawal. Types of defined contribution plans include:
Types of plans that you cannot use a QDRO to divide include:
You can usually divide these types of plans as a part of your divorce, but you won't use a QDRO. To divide an IRA or deferred annuity, you use an ordinary court order. For the other types of plans, the plan agreement usually determines how (and in some cases, whether) the plan will be divided in a divorce.
Dividing retirement accounts in divorce can be very complicated, and you'll want a good family law or tax attorney to help you figure out the best or fairest division. Questions you'll have to tackle include:
Because this aspect of a divorce is so complicated—and because it is so important to do it right -- if you are representing yourself in your divorce, seriously consider hiring a lawyer to help you with this portion of your property division.