As the Capital District encompasses the seat of state government, many in our community are employed by government entities. Government employees often participate in employer-sponsored retirement plans, such as pensions, deferred compensation plans, etc.
A retirement asset is often the single most valuable asset that a person owns (other than real property). To the extent that the retirement asset, or any portion of it, was acquired during the marriage, it is subject to equitable distribution upon a divorce. For example, if one spouse participates in a pension (we will call this spouse the “participant”), the pension would be equitably distributed so that the other spouse will receive a share of the pension at the time the participant retires. You may recall from our prior articles, that “equitable distribution” refers to the method used in New York for dividing marital property. Equitable distribution means that property is divided fairly, but not necessarily equally.
Although New York law governs how the retirement asset is divided between spouses, the actual division of the retirement asset may be governed by federal law if the asset falls within scope of the Employee Retirement Income Security Act of 1974 (“ERISA”). ERISA is a federal law that is designed to protect certain retirement assets so that a retiree has enough income after retirement. ERISA prohibits the assignment of the retirement asset to another person (such as a creditor). Pensions, deferred compensation plans, and 401(k) plans are examples of retirement assets that are subject to ERISA.
While ERISA does not prohibit the right of a former spouse to receive a share of a retirement asset, the former spouse cannot receive her share unless and until a court order known as a Qualified Domestic Relations Order (“QDRO”) is signed by a court. This is a special court order that directs the plan administrator of a retirement asset to pay a portion of the participant’s account to his former spouse. This order must be written in a manner that complies with federal law and the plan administrator’s rules before it will be “qualified” and recognized as a valid QDRO. A QDRO must also be written so that it is consistent with the marital settlement agreement, or Judgment of Divorce, which provides how much the former spouse is to receive for her share in the retirement account.
Since a QDRO cannot be signed until a Judgment of Divorce is signed, I have encountered many people who have either forgotten that a QDRO is necessary or who wait years (sometimes decades!) to have the QDRO prepared. This is unwise, especially if the former spouse is entitled to receive survivor benefits if the participant-spouse dies prior to or after retirement. Without a QDRO on file, a plan administrator will not recognize any rights that the former spouse may have in the retirement asset.
As the division of a retirement asset implicates state and federal law, and since a QDRO must comply with the rules of each plan administrator, a QDRO should always be prepared (and reviewed) by a skilled attorney. If a QDRO is not done, or done incorrectly, the participant or former spouse could lose out on several hundred, if not thousands, of dollars.