All About QDROs
If you are dividing retirement assets in your divorce, it’s critical to obtain a Qualified Domestic Relations Order (QDRO) before finalizing the divorce settlement. QDROs are special court orders that assigns a specified percentage of one person’s retirement plan or pension to another person without incurring any tax liability. It does not apply to IRAs but does to almost every other type of retirement plan or deferred compensation plan.
If you have negotiated to receive a portion of your former spouse’s pension upon their retirement, you must have a properly executed QDRO in place. Without one, you are at high risk of having no rights to the funds, even if your divorce decree states that you do. Here’s what you need to know about this indispensable document.
What does a QDRO do?
The Internal Revenue Service defines a QDRO 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 dependents of a [retirement plan] participant.” In other words, the QDRO permits an “Alternate Payee” to receive a specific, defined portion of the retirement assets that a “Participant” has earned through an employer-sponsored pension or retirement plan. When a QDRO is properly executed, the alternate payee will have an interest in their ex-spouse’s retirement plan as if they had earned the benefits themselves.
Which retirement plans need a QDRO?
If a retirement plan is covered by the Employee Retirement Income Security Act of 1974 (ERISA), it almost always will require a QDRO to divide the benefits in the account. Most employer-sponsored plans are covered by ERISA and thus require a QDRO. Retirement plans not covered by ERISA, such as Individual Retirement Account (IRA), do not require a QDRO and can be divided like any other marital asset upon divorce. Check the terms of your plan to be sure or ask your lawyer.
What should a QDRO contain?
To be effective, a QDRO requires very precise, specific language. It must identify the exact names of the plan, the Participant (the employee spouse), and the Alternate Payee. It must also detail the precise percentage or dollar amount that the alternate payee is entitled to, the form and frequency of payments, and include any specific language required by the State and the plan. If the couple intends for the Alternate Payee to receive or continue receiving the benefits after the Participant’s death (“survivor benefits”), it must expressly state so. Finally, the percentage or amount to be directed to the Alternate Payee must not exceed or otherwise stray from the limits set by the retirement plan’s rules.
Beyond specific language and rules, a couple usually has a fair degree of flexibility to apportion the retirement funds as best suits their situation. For example, you might choose to have the amount distributed in a lump sum upon the Participant’s retirement, have a monthly disbursement, or rollover the amount into an IRA to the Alternate Payee’s benefit. “Every single plan is different,” says Nancy Hetrick, a Certified Divorce Financial Analyst (CDFA). “This is an area rife with complexity and choices that aren’t even looked at.” To understand the full range of your QDRO options, you should speak with a qualified financial analyst who specializes in divorce.
How do you file a QDRO?
After you and your ex have agreed on the terms of the QDRO, you (the Alternate Payee) should send a copy of the draft to the retirement plan administrator to determine whether it adheres to the plan rules. Once the administrator approves it, you and your spouse will need to sign the QDRO in the presence of an attorney or public notary. Afterward, you or your attorney will file the QDRO with the court, where the judge will sign it, and it becomes official.
When should you file a QDRO?
The Alternate Payee is responsible for ensuring that the QDRO is filed with the court. Ideally, you should file a QDRO before your divorce decree is finalized or as soon as possible thereafter. Although you can file a QDRO after the divorce is final, you risk of losing your right to the funds.
For example, Nancy Hetrick, a Certified Divorce Financial Analyst, once worked with a client whose ex-husband had a state pension and was close to retirement. The couple had decided that the wife would be entitled to 50 percent of the marital value of the pension, however they never filed a QDRO. Within 30 days of the divorce being final, the husband committed suicide. Because the ex-wife did not have a QDRO, she lost all her rights to the benefits. The entire amount of the plan reverted to the State.
You could also lose your right to your former spouse’s retirement benefits if you haven’t filed a QDRO and:
- Your ex-spouse marries again
- Your ex-spouse takes disability retirement instead of a longevity retirement
- Your ex-spouse moves, and you can no longer locate them
- Other unpredictable life circumstances occur.
Previous article: Common Issues with Pensions During Divorce and How to Handle Them
If you have questions about QDROs or pensions, speak to a qualified divorce financial analyst or call our team at Miller Law Group to schedule a confidential consultation.