Next to a home, pension or other tax-deferred benefit plans are often the largest family investment made during a marriage. One of the most frequent questions for domestic law attorneys relates to the division of these plans after a divorce. As part of a divorce, the Court may retain the power to divide property. In Delaware, marital property is divided on an equitable basis. This marital property may consist not only of homes, vehicles, and bank accounts, but also of pension plans and 401(k) savings plans.
Pension and tax-deferred plans are not like an ordinary bank account, however. If half of the money is simply withdrawn from the plan, this will result in a large tax debt to one or both of the parties. Further, some plans, such as traditional pensions, do not have a “value” to withdraw—the investment gives the employee a right to receive payments in the future.
In either case, the plan must be divided by Qualified Domestic Relations Order (a “QDRO”). A QDRO is a court order which divides the marital interest in pension plans and 401(k) savings plans, and contains specific language to ensure compliance with Federal and State laws. Some governmental or military pensions require a different type of Order—similar to a QDRO—to be divided properly.
Many pension plans—where the plan is set to pay a certain benefit at retirement—are divided by a QDRO that uses a formula which provides payment to a former spouse based on the length of the marriage and the years of employment while married.
This is often referred to as the “Cooper Formula”. 401(k) and other tax-deferred savings plans are also divided by QDRO, but there is no set formula for how those plans will be divided. Often the same percentage applied to other marital assets is used to divide tax-deferred plans as well.
Because they involve serious financial rights, QDROs are complex documents that contain pitfalls for the average person. Moreover, because each pension and 401(k) plan is different, different plans require different language and choices to be in the QDRO before it will be accepted and the funds or benefits divided. It is strongly suggested that an attorney draft a QDRO to divide your pension plans and tax-deferred assets.
It is essential to have a QDRO drafted and accepted by the plan manager as soon after the divorce as possible. Valuable rights and funds may be lost if the accounts are not separated or distributed properly. In addition, some of the tax benefits of the plans may be lost if they are not divided properly. The Family Court cannot provide you legal advice or guidance on how to draft a QDRO that protects your rights.
The Family Law attorneys at Doroshow, Pasquale, Krawitz & Bhaya can represent you and ensure that your rights are protected. Call us today for a consultation: 1-800-632-9230.