Very often, retirement assets constitute a significant part of the assets accumulated during a marriage. Retirement assets may include IRA’s, 401(k) plans, 403(b) plans, pensions, employee stock ownership plans, profit sharing plans, 457 plans, certain tax-sheltered annuities and other “qualified” plans under ERISA.
In a New Jersey divorce, retirement assets are subject to equitable distribution, just like all of the other marital assets. However, the equitable distribution of retirement assets can be complicated, and the consequences of making mistakes can be extremely significant.
The equitable distribution of some—but not all—retirement assets requires the entry of a Qualified Domestic Relations Order (QDRO).
A QDRO is a court order—entered separately from the Judgment of Divorce—which instructs the administrator of the retirement plan to make a distribution of a certain percentage or designated specific amount of one party’s retirement plan to the former spouse.
The distribution itself does not result in tax to either party—as long as it is handled correctly.
Due to the complexity of distributing retirement assets, it is not uncommon for mistakes to be made. Those mistakes can include, among others:
- Failing to Address Earnings and Losses in a Defined Contribution Plan. There is almost always a significant gap between the date of division and the date that the funds in a defined contribution plan are actually divided. What if the value of a 401k plan is $250,000 as of the date of the Marital Settlement Agreement (MSA), but it has increased to $300,000 as of the date of distribution? The former spouse may receive only the agreed-upon percentage of the $250,000—unless the MSA provides that the former spouse will share in the earnings. Of course, the opposite scenario can also occur (i.e., the value of the assets can go down). In that case, the former spouse may receive more than what the parties actually intended, unless the MSA addresses this issue.
- Agreeing to the Distribution of a Specific Dollar Amount Without Assessing the Risks. The issue raised in the previous paragraph is not limited to situations where the former spouse receives a percentage of the retirement asset. Many New Jersey MSA’s provide that the former spouse will receive a specific dollar amount from a retirement asset. What if the value of the retirement asset is $200,000 at the time of the MSA, the MSA states that the former spouse will receive $100,000, and the value of the retirement asset is only $90,000 as of the date of distribution? Conversely, what if the value of the retirement asset is $300,000 as of the date of distribution? In either scenario, one of the parties faces a presumably unintended result which will have severe financial consequences.
- Failing to Address Surviving Spouse Issues. It is essential that both pre-retirement and post-retirement surviving spouse coverage are explicitly addressed in the MSA. If the retirement asset is a traditional pension (in which neither party will receive benefits until the pension holder retires), will the former spouse be treated as the surviving spouse if the pension holder dies before he/she retires?
- Ignoring Loan Balances on Retirement Assets. It is also essential to determine whether there is a loan against a retirement asset. This is often not obvious from the Account Statement, which may state that the “total balance” of the retirement asset is a certain amount, whereas the “total account value” is actually a different amount. Although an outstanding loan is considered an asset in most plans, they cannot award any portion of a loan balance through a QDRO.
- Failing to Make Sure that the QDRO is Implemented. The division of a retirement asset is not “complete” until the QDRO has been received and accepted by the Plan Administrator. Therefore—especially when the former spouse must wait for many years until a pension holder retires, it is crucial that the former spouse have a formal letter from the Plan Administrator, confirming that the QDRO will be implemented at the appropriate time.
Choosing the right law firm in a New Jersey divorce case makes all the difference.
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