After property is divided in a divorce either by Marriage Settlement Agreement or by the court, the final step is to ensure that property is properly distributed. Although it is relatively simple to divide tangible assets such as cars and houses, problems sometimes arise when parties have significant assets such as retirement accounts. When a retirement account such as an IRA or 401K or other investment account is divided between parties who are divorcing in Pennsylvania, a Qualified Domestic Relations Order (QDRO) is often required.
A QDRO is defined by the Internal Revenue Service as “a judgment, decree or order for a retirement plan to pay child support, alimony or marital property rights to a spouse, former spouse, child or other dependent of a participant.” This document is requires to ensure that the distribution is properly realized. Most retirement plan administrators have their own requirements for drafting QDROs, but the IRS requires that a QDROs contain certain specific information, such as: the participant and each alternate payee’s name and last known mailing address, and the amount or percentage of the participant’s benefits to be paid to each alternate payee. Furthermore, a QDRO may not award an amount or form of benefit that is not available under the plan. When attempting to divide the value of a retirement account, it is important to make sure you have a copy of the plan description and any QDRO requirements that the plan may have.
A spouse or former spouse who receives QDRO benefits from a retirement plan reports the payments received as if he or she were a plan participant. The spouse or former spouse is allocated a share of the participant’s cost (investment in the contract) equal to the cost times a fraction. The numerator of the fraction is the present value of the benefits payable to the spouse or former spouse. The denominator is the present value of all benefits payable to the participant. A QDRO distribution that is paid to a child or other dependent is taxed to the plan participant.
QDROs are often the most complicated part of dividing property in a divorce. If not done properly, parties can lose out on thousands of dollars in benefits they would have otherwise received. If you have questions about equitable distribution or QDROS in Western Pennsylvania, contact our Pittsburgh office today!