Does a 401(k) Distribution in Divorce Require a QDRO?

I was reading a nice article from Fred Klarer who is a mediator on Long Island who shares my opinion on QDRO’s also known as Qualified Domestic Relations Orders and I wanted to share it with you as often times I am asked by clients looking to save money if they really need a QDRO.  I’ll let Fred explain in his article below.  The original can be found by going here.

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Qualified Domestic Relations Orders (QDRO) are expensive; they are required in order to transfer pension assets in a divorce without incurring the 10% penalty for early withdrawal. But many financial institutions will transfer a 401(k) without a QDRO, and just have you sign a simple form instead. Seems like a good idea — look at all the money you save.  Is there a catch?

Don’t Incur A Needless Tax Penalty in Divorce.

Unfortunately, there is. If the QDRO is not properly prepared and signed by a judge, you will be subject to the federal income tax 10% early withdrawal penalty. You could end up being subject to a tax on monies that you have already transferred to your spouse pursuant to the divorce settlement.

How to Avoid a Needless Tax Penalty in Divorce.

To be valid the Qualified Domestic Relations Order must meet two criteria: it must be correctly created and it must be correctly verified.

To be correctly created it must have been signed by a Judge and it must contain the following information:

1. your name and most recent mailing address.

2. the name and address of your spouse (known as the alternate payee).

3. the amount or percentage of the account that is to be paid to your spouse.

4. how the amount or percentage that is to be paid to your spouse is to be determined or calculated.

5. the number of payments or the period of time to which the QDRO applies.

6. the name of the Plan to which the QDRO applies.

The second thing that must be done is the Qualified Domestic Relations Order must be validated, that is, the Plan must determine that it is legally valid and what they must do about it. That is often done in a pre-approval process, before the QDRO is submitted for signature to the Court. One way or another, however, the Plan must do the following:

1. notify you and the alternate payee that it has received the QDRO and explain to you how the Plan will determine its validity.

2. determine within a period of no more than 18 months whether the QDRO is valid or not; this is almost always done through a pre-approval process.

3. account for any payments to be made to the alternate payee during the evaluation period.

4. notify you and the alternate payee whether the QDRO is valid or not.

It can be an expensive process, particularly if your divorce involves a number of pension assets that must be transferred. Each QDRO can run about $1,000.

Don’t let convenience get the better of you. Do it right, or you pay a great deal in unnecessary taxes.

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To add to Fred’s article one more point and that is: Qualified Domestic Relations Orders are VERY difficult to draft.  Do NOT do this by yourself or if you do, please do so at your own risk.  One simple mistake and perhaps the QDRO gets rejected and you find yourself with no share of the retirement assets you are entitled to.  Not a great place to be in especially if you’re getting close to retirement age or don’t find it out until a much later date in time.  I know, divorce can seem expensive but if you use a NJ mediator like me or NY mediator like Fred, you can save yourself a lot of money and heartache in the process and put that money towards making sure the details of your agreement are legally binding and properly executed.

Feel free to give our offices a call at (908) 864-2177 if you have any questions about QDRO’s (Qualified Domestic Relations Orders) and how they may apply in your particular situation.

How Child Support is Paid in NJ

In New Jersey there are three different ways one can collect on a child support award that is granted per the terms of your divorce.  And while as a NJ divorce mediator I am all in favor of keeping it friendly, sometimes the easy route isn’t always the best route.  Before we begin, allow me to remind you of a few important facts about child support in NJ.  First is that child support is a non-tax issue. That means it is simply a transfer of funds from one party to another to cover their share of the parenting expenses for the parties’ children.  It is not deemed as income to one party or a tax deduction to the other – it is a completely tax-neutral transaction.  The second important note on child support is that it is the obligation of BOTH parties to pay child support.  While it may appear as if one party is actually paying, that simply represents the difference in the two parties’ shares.

How Child Support is Paid in NJ Option 1 – The Direct Pay Method

The easiest way to pay child support is to set up a schedule of payments on a weekly, bi-weekly or monthly basis and simply write a personal check from one party to the other.   As I am fan of using technology to make things easier on everyone, you may also wish to consider setting up a regularly occurring debit from one parties’ account to the other.  This way the payments are made directly and there’s no need for one party to go to the mailbox and the other to go to the bank.  The pro of this method is that it’s easy and the con is that you’re trusting the other party to pay.  And while I’d like to believe parents will always do the right thing and pay their child support on time, it’s not always (sadly) the case.

How Child Support is Paid in NJ Option 2 – Wage Garnishment

In this case if necessary you can appeal to the courts for a wage garnishment as child support is a contractual obligation and enforceable with garnishment.  If you choose to pursue this route, you will need to first obtain an order form the courts allowing the garnishment and then work with the ex-spouses’ employer to have the garnishment put into effect.  The pro of this route is that the payment will be made in a timely fashion and is enforced by a court order.  The cons are that it may be costly to go to court to obtain such an order and it would most certainly be embarrassing for the parent who chose not to pay to have their employer know their business.  Then again, that may just be the impetus one needs to write that check and avoid the whole ugly mess of garnishment in the first place!

How Child Support is Paid in NJ Option 3 – State Agency

Here in NJ we have the NJ Child Support Payment Center which can help parents facilitate the payment of child support.  The pros of using such a service is that there’s no cost to either party and the state can get involved in the enforcement should it be necessary.  The cons are that again, it may prove embarrassing to one party and may create an extra layer of administrative burden but if you can’t go with option 1, then you’re really only left with garnishment or using the payment center.

If you have questions about how child support is paid in NJ, please give our offices a call at (908) 864-2177 and we’d be happy to help.

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