This is the ultimate guide to QDROs (Qualified Domestic Relations Orders).
If you or your spouse has a retirement plan or pension, chances are you will need a QDRO. So, it behooves you to understand the “rules of the road.”
The truth is QDROs are complicated and mistakes can be costly. In this guide, you’ll learn everything you need to know about QDROs, including the requirements, process, common mistakes, and more.
Let’s dive in.
What is a QDRO?
A Qualified Domestic Relations Order (QDRO) is the legal instrument (document) utilized in a divorce or legal separation to divide retirement plans without tax consequences.
How are pensions and retirement plans divided in a divorce?
Pensions and retirement plans (such as IRAs 401Ks) accumulated during marriage are considered marital/community property in virtually all states.
This means they must be divided equitably in a divorce.
Depending on how the division of assets is negotiated, it may be possible to keep a larger part of a pension in exchange for giving up your interest in another asset (such as the family home).
To divide pension and retirement accounts in divorce, a divorce decree must order that these assets be divided.
When specified in a divorce decree, the mechanism that is used to split retirement accounts in divorce is as a Qualified Domestic Relations Order, or QDRO (pronounced “quadro”).
While the term ‘QDRO’ is technically only correct when used to refer to private entity retirement plans governed by ERISA (non-governmental), QDRO is commonly used by divorce professionals to refer to any separate court order that is specific to the division of a retirement asset.
For ease of reference, the term ‘QDRO’ will be used when referring to the division of both qualified and non-qualified retirement plans.
A firm that specializes in preparing QDROs or your divorce attorney can prepare the documentation needed to execute a QDRO.
Most divorce attorneys shy away from preparing QDROs since it is highly technical and mistakes can be costly.
It must be approved by the court and then submitted to a plan administrator who must also approve it.
The order is not technically “qualified” or “approved” until it’s been reviewed and approved by the plan.
Once reviewed and approved or ‘qualified’ by the plan administrator, the plan administrator then divides the retirement plan according to the specifics contained in the QDRO.
What information does a QDRO need to contain?
At a minimum, a QDRO must contain the following:
- The formal name of the plan (The number one reason why QDROs are rejected by the plan administrator is that the plan name is incorrect.)
- The full name and last known mailing address of the participant spouse (referred to as the “plan participant”, “employee spouse”, “member spouse”), and the “alternate payee” (spouse, former spouse, child or other dependent of the employee spouse). Note that children who are not related to the employee/member spouse (children of the non-employee spouse but not the employee spouse), generally will not be considered a proper ‘alternate payee’ by the plan administrator.
- Social Security numbers and dates of birth of both parties (which can and should be provided in a separate document not filed with the court)
- Participant’s plan identification number if different from the participant’s Social Security number
- The amount or portion of the plan benefit payable to the alternate payee and the method to be used to calculate such amount
- the number of payments or time period to which the order applies.
- [ERISA § 206(d)(3)(C)(i)-(iv); IRC § 414(p)(2)(A)-(D)]
What are legal compliance requirements for a QDRO?
If the court order dividing a plan is for a plan that is a private plan established under the Department of Labor, then it is ‘technically correct’ to refer to that division order as a QDRO after it has been qualified by the Plan administrator. For these orders, there are three general sets of compliance rules that must be followed:
- The requirements of the individual plan
- The domestic relations laws of the state where the QDRO is being executed (i.e. must meet either community property or equitable distribution laws for divorce in a particular state).
- The requirements of ERISA (The Employee Retirement Income Security Act of 1974).
Are there certain types of plans that can be split under a court order that is like a QDRO but are not covered by ERISA?
Examples of retirement plans NOT covered by ERISA, but that can be split under a separate court order that ‘looks’ like a QDRO include:
- Armed Forces Retirement System (Military Pension Plan) under a Military Division Order (MDO) (covered by the Uniformed Services Former Spouses’ Protection Act), or Uniformed Thrift Savings Plan (TSP)
- State and Municipal retirement plans that might adopt state or local laws
- Federal Retirement Plans (the Civil Service Retirement System(CSRS), Federal Employees Retirement System (FERS), which are divided under a ‘Court Order Acceptable for Processing” or ‘COAP’ and Civil Thrift Savings Plan (TSP)),
- Individual Retirement Accounts (IRAs) (SEP-IRA, SIMPLE IRA, Roth IRA). However, a QDRO can be used to divide an IRA because it is a “divorce or separation instrument described in subsection (A) of section 71(b)(2)” under IRC section 408(d)(6). While the only requirement under federal tax code is a “divorce or separation instrument described in subsection (A) of section 71(b)(2)” under to IRC 408(d)(6), some IRA administrators complicate the division by creating different requirements that are not uniform across all financial institutions (some IRA administrators require signature guarantees-but not all, some require that individual investment ‘ticker symbols’ be listed out with the number of shares of each or the percentage of each that are to be divided-but not all, some have their own internal transfer forms that are required for division-but not all, etc.). These retirement plans can be divided by orders similar to a QDRO.
What is the difference between a defined benefit plan and a defined contribution plan?
When dividing a retirement plan, your account will be one of two types of employer-provided retirement benefits.
A defined benefit plan is a traditional pension that pays a retiree a specific amount during retirement.
An accrued benefit is the amount of benefits a participant has earned under a defined benefit pension plan as of a particular date.
It is usually based on the employee’s years of service with the company, along with their final average compensation as of the calculation date.
With a traditional pension plan, the monthly benefit amount is formulaic in nature and are generally not tied to any market rate of return.
Defined benefit pension plans generally need an actuary or financial expert to calculate the present value of the pension for divorce purposes.
The benefit statement may show an account balance or value. This doesn’t represent the true value of the pension. In fact, this significantly understates the pension value in most cases.
The total balance listed on the benefit statement above is $365k.
Guess how much the pension was worth when we got an actuarial valuation?
North of $2.2M!
If you want to understand more about how much your pension is worth, you can check out our guide to pension valuations here.
A cash balance plan is a type of defined benefit plan that maintains hypothetical individual employee accounts like a defined contribution plan, whereby participant’s notational accounts receive “pay credits” (similar to contributions) as well as “interest credits”.
Cash balance plan ‘rate of returns’ can be tied to some market returns but generally have a ‘floor’ at which interest does not drop below.
The other type is a defined contribution plan where the employer, the employee or both contribute to the plan.
Some of the more common types of defined contribution plans are 401(k), 403(b) and 457(b) plans, as well as employee stock ownership and profit-sharing plans.
The participant is generally able to receive the account balance (together with any interest accrued and investment gains and/or losses) when the employee retires or terminates employment.
A common misconception with dividing defined contribution plans is that the dollar amount as of date of divorce/separation is ‘static’ until division.
For example, if an account has $100,000 in investments as of the divorce/separation date, the alternate payee might believe they are receiving $50,000 down to the penny at the time of transfer of funds.
It is important to understand that because defined contribution accounts are invested in the market, they may fluctuate in value and the underlying dollar value that is transferred may be more or less than is expected.
By analogy, if an account has 100 shares of ABC stock in it as of date of separation/divorce and the value of those shares is $10 a share, then the alternate payee can expect to receive 50 shares of ABC stock (which at the date of separation/divorce-are worth $500).
If the value of an ABC stock goes up to $15 a share (50 x $15 = $750) or goes down to $5 a share (50 x $5 = $250), it doesn’t change the fact that alternate payee is entitled to 50 shares.
It’s important to understand which type of plan you have because certain rules regarding division of these accounts based on the account are applied differently.
What are the steps involved in the QDRO process?
First, you will need to gather all of the required information (names, address, Social Security numbers, etc.) as well as a copy of your divorce decree, the Summary Plan Description for the retirement account and the written QDRO Procedures.
From this, your attorney or QDRO service provider will draft your QDRO and once you have verified it for accuracy, it will be sent to your spouse or their attorney for review and approval.
If it is accurate and conforms to the divorce decree, it should be accepted, although this is not always the case.
Once you and your spouse agree on the terms of the QDRO, it is sent to the plan administrator for review and approval in draft form.
Plan administrators will often request changes and insert their own language.
Usually, these changes are minor and not a cause for alarm.
Also, some plans will decline to review drafts in advance, and in those cases, this step is eliminated.
After pre-approval, spouses sign the document and the QDRO is submitted for a judge’s signature by your attorney.
After it has been signed and filed by the judge, spouses should obtain a certified copy of the QDRO which can be obtained from a clerk of the court for a small fee.
The certified copy is then sent to the plan administrator for final approval and division of account.
This generally happens fairly quickly, especially if it has been pre-approved by the administrator.
How long does the QDRO process take from start to finish?
Of course, every case is different, but in general, and assuming no delays or minor delays, you should plan on the process taking six to eight months.
Variables can include how backed up your superior court is with processing court orders, the complexity of the plan, if the wording is precise/appropriate and quickly pre-approved by the plan or sent back with major changes, and whether or not you are working with a cooperative spouse or not.
Of all the steps, the one that usually takes the longest is for the plan administrator to review the draft plan.
Can I prepare a QDRO without using a QDRO attorney or QDRO consultant?
Technically yes, but…
The stakes are usually high when dealing with retirement accounts and unraveling the legalities and requirements of a QDRO can be complicated.
Any small error can be costly and you don’t want to gamble with your nest egg.
You can use a web-based template to prepare a QDRO that you can submit to the court, or you can contact a plan administrator to see what their requirements are.
Chances are they will have a standardized form you can use.
However, in many instances, the plan administrator attorneys have crafted the template to advantage the plan or the employee spouse, leaving the non-employee alternate payee at a disadvantage.
This is particularly true for ‘underfunded’ plans where the plan attorneys are looking for ‘loopholes’ to lower the amount of benefits they are required to pay out in a given court order.
These ‘loopholes’ are generally buried in the survivor benefit sections of the QDRO templates and if you don’t know what to look for, you may find yourself receiving less money than you are entitled to, at the end of the day.
But the bottom line is, don’t be pennywise and pound foolish.
Use an experienced QDRO attorney or reputable online QDRO company to make sure you get what you’re entitled to.
What is the best online QDRO service?
There are a lot of options for online QDRO companies. Unfortunately, most of them will NOT solve your problem.
Sure, you’ll walk away with a document – but chances are you won’t have any confidence that it was prepared correctly.
In fact, I’ve tested several of these services myself. As a divorce financial expert, I still struggled to know whether I was answering the questions properly. I couldn’t imagine how confusing this process would be if you’re not well versed in dividing retirement plans.
My #1 recommendation for preparing QDROs online is QDRO Counsel. Here’s why:
- QDRO Counsel handles all types of pensions and retirement plans (401k plans, military plans, state and local government plans, and the list goes on)
- They offer a few pricing options so you can choose the package that works for you. It’s a one-time fee – so you don’t need to worry about fee schedules, retainers, or hourly billings.
- Depending on the package you choose, QDRO Counsel will draft the QDRO, get it preapproved by the plan administrator, draft judgment language, collect signatures, file the QDRO with the court, and serve the final QDRO on the plan.
- QDRO Counsel can even help with separate property calculations (if you have a premarital interest) and valuing pensions
- The interface on the other online QDRO companies is atrocious
And be sure to use the promo code SURVIVE20 to get $20 off.
Can one QDRO handle all of the retirement accounts in a divorce?
Generally, no. You will need to execute a separate QDRO for each retirement account that needs to be divided.
Will I have to share my entire pension or retirement plan in a divorce?
Most states consider pension and retirement plans as marital assets, but only the portion earned during marriage.
Any payments into a pension plan prior to or after the marital period may be considered a separate asset.
There are a few states where the portion earned prior to marriage may also be considered a marital asset.
Be sure to check the particular laws regarding this subject for your state.
You can also keep your pension intact if you’re willing to offset it by giving up other assets.
Is there a statute of limitations for filing a QDRO?
There is no specific statute of limitations that apply to how long you have to file a QDRO.
If it is in a divorce decree then you can wait a long time to file the QDRO and most likely still get the benefit you are legally entitled to receive (but not always).
However, the prevailing advice among all experts is that you should file a QDRO as soon as possible.
The other thing to consider is that while nothing is specifically related to filing a QDRO, some states have general statutes of limitations with actions related to a divorce.
For example, in Utah, that statute of limitations is eight years. Utah Code § 78B-2-311 provides that, “An action may be brought within eight years upon a judgment or decree of any court of the United States, or of any state or territory within the United States.”
If there are delays in filing and processing a QDRO, your best bet is to consult an experienced family law attorney who can guide you through the process.
Are there other downsides to waiting to file a QDRO?
If you delay filing a QDRO, opting to wait until a former spouse retires or until you need the money, you may lose valuable rights or you could even lose the benefits you are entitled to receive.
If your spouse, retires, remarries, dies, is fired or quits, withdraws funds from the plan before retirement or takes out a loan against the plan, you could lose your rights and your benefits.
It is possible that if you wait too long to enter your QDRO and another former spouse enters their QDRO claiming the entirety of your prior spouse’s pension, you are out of luck!
Timing matters with respect to who is entitled to benefits first.
What legal rights do I have to access my spouse’s retirement account plan information?
When you are a potential alternate payee, you have the legal right to contact the plan administrator and ask for things such as the plan description, your spouse’s benefit statements and all related documentation.
You might also want to ask for a sample copy of the plan’s QDRO which will make it easier to follow compliance requirements later on.
If the administrator balks at giving you the information, you can mention Department of Labor regulations and this should remove any roadblocks for you.
Are retirement accounts always divided evenly?
Not necessarily. The first step is to determine whether the retirement account has a marital (or community) interest.
If a retirement account is separate property, then it won’t be subject to division.
Sometimes, a court will not divide employer retirement plans. This can take place when each spouse has their own plan and the court may let each spouse keep their own plan.
In other instances, the court may allow a spouse to keep their retirement plan intact, but award a greater share of a different asset to the other spouse to make sure a division of assets is equitable.
Since retirement accounts are often one of the largest assets in a divorce, it’s not uncommon to trade an interest in the family home for a greater interest in retirement accounts.
What is the most important rule that governs how a retirement plan is divided?
One of the most relevant factors in dividing a retirement plan is whether or not the participant was already enrolled in the plan prior to getting married or not.
If participation started after marriage, then each party is generally entitled to 50% of the participant’s value as of the date of the start of the divorce action, date of separation, the date of the settlement agreement or the date of the settlement agreeing to the distribution.
This date will need to be agreed upon by the parties in the divorce.
If you participated in a defined benefit plan before you got married, then a coverture formula is used which basically prorates the amount of time you were in the plan before marriage versus the amount of time you were in the plan while married.
If you participated in a defined contribution plan before you got married, then you may have the burden of proof (such as in California) to prove you contributed to the plan prior to marriage.
If not then the court will generally consider the account entirely marital property on the date of separation.
Remember that even though you might be entitled to 50% of the account, that amount can be offset by taking a greater or lesser share of other assets in a marriage (i.e. house, cars, jewelry, etc.)
What if I don’t know how to contact my spouse’s retirement plan administrator?
You can track down the plan’s most recently filed Form 5500, and the form should tell you everything you need to know about who to reach out to and how.
If you’re using the premium package on QDRO Counsel, they will handle this for you.
What are the tax implications of executing a QDRO?
Transferring the portion of the pension or retirement account from one spouse to another is not taxable to the spouse receiving the funds.
However, when a spouse who was awarded the funds takes a distribution from the retirement plan, they must pay taxes on what they receive in their bank account.
If you receive a distribution from your former spouse’s 401k or other retirement plan, after the plan creates a separate account in your name, you can generally roll these funds over into your own 401k or IRA.
If executed properly, you will not have to pay income taxes on those amounts when the rollover takes place.
Rollovers are not arranged in the QDRO itself.
You can arrange a rollover directly with your former spouse’s plan.
If you take a cash distribution instead of rolling over the funds into your own plan, the plan is required by federal law to withhold 20% of the amount you receive for federal income taxes.
It is similar to having federal income tax withheld from your paycheck.
You can claim the amount the plan withholds on your federal income tax return when you file it the year following the payment to you.
If you want your funds immediately, you can avoid the 10% penalty on early withdrawals (prior to age 59-1/2) by taking the funds directly from your portion of the former spouse’s 401k or similar plan.
You must request this immediate distribution prior to rolling any remaining funds into your own qualified plan or IRA.
The early withdrawal penalty waiver does NOT apply if the account being divided is an IRA.
If you first roll the funds over into your own plan or IRA and then withdraw them from your own plan, you may needlessly re-subject yourself to the 10% penalty.
If the alternate payee receives money through a QDRO from a Roth 401(k) plan, the benefits would not be taxable since they were originally contributed to the plan on an after-tax basis.
As you can see, the rules here can get complicated, and it may be in your best interests to consult with a Certified Divorce Financial Analyst (CDFA) to gain a full understanding of what the tax implications will be for your situation and what your best strategies for avoiding taxes will be.
How soon after a QDRO is completed will I be able to access my funds?
It depends on the type of retirement plan.
With a defined contribution plan, such as an IRA or 401k, the funds can be transferred to an IRA in your name. While you can access these funds at any time, you might be subject to an early distribution penalty if you take a distribution prior to age 59 1/2.
You should be aware that you may be able to avoid the early withdrawal penalty if you receive a QDRO distribution from your spouse’s 401k (or other qualified retirement plan) prior to rolling over the funds to an IRA in your name. Once the funds have been transferred to an IRA in your name, you’re no longer eligible to take advantage of this workaround.
With pensions, you may not have access to the funds until after the employee retires or at least attains the earliest retirement age allowed by the plan. This could be as low as 50 or 55 years old, depending on the pension plan.
QDROs can be drafted so they require the retirement plan to provide funds at the earliest possible time allowed by law.
But a QDRO can’t override federal laws or the written terms of the pension plan which specify when the earliest date that payments can begin.
Do reporting and disclosure provisions apply to alternate payees receiving plan benefits under a QDRO?
Yes. As an alternate payee, you have all the rights and privileges of a beneficiary under the plan, so you should receive summary plan descriptions, annual reports, and an explanation of rights.
What are the most common QDRO mistakes?
When it comes to QDROs, there a number of important rules that need to be followed carefully as mistakes can be costly.
In fact, the vast majority of divorce attorneys steer clear of QDROs, instead opting to have a QDRO attorney prepare and file any QDROs. Given the liability involved, I can’t say that I blame them.
Here are several things that can trip you up when preparing a QDRO. It’s worth the time and effort to be aware of them so that the division of any retirement plans can move forward without a hitch.
QDRO Mistake #1: Not understanding the type of plan that needs to be divided.
Settlement agreements are often written a bit vague and only describe “retirement plans to be divided” without specifying whether they are defined benefit or defined contribution plans. In some cases, retirement plans are a hybrid of both, which can make the tasks of division more challenging.
It’s important to understand the differences between the types of plans that are being divided. Also, in many cases, each plan will require a separate QDRO to be executed so your plans will need to be treated on an individual basis.
Defined Contribution Plans. The most common example of a defined contribution plan is a 401(k) Plan. With a defined contribution plan, employees put pre-tax contributions or a fixed percentage of their salary into an account maintained in their name.
Under this scenario, there is no guarantee of how much money will be in the account when the employee retires. The amount depends on the performance of the investments that the funds are placed in over time. The only part that is guaranteed is the amount that an employer will also contribute to the account while it is active.
Defined Benefit Plans. With a defined benefit plan, there is no specific account that is maintained for an employee. Instead, an employee earns credits based on the amount of time they work for an employer. A traditional pension plan is the most common type of defined benefit plan. Under this scenario, an employee will receive a monthly benefit for the rest of their lives after they retire. The amount will be based on the number of credits they have accrued. The dollar amount they receive is what is defined or guaranteed to the employee. The employee must be vested to receive the benefit, with vested meaning that the employee has worked long enough for the company to have earned the right to collect retirement benefits.
With a defined contribution plan, it is fairly simple to divide because an employee will get a statement that will show exactly how much they have in their account at any particular time. The spouse of the employee will be entitled to a portion of those funds that were earned while the couple was married. In most cases, anything earned before marriage or after a date of separation is considered a non-marital asset and is not subject to division.
Dividing a defined benefit plan is more complicated because the value of the benefit at any given time can only be determined based on actuarial calculations and assumptions regarding when the employee will retire or leave the company and what his salary will be at that time.
Cash Balance Plans. Cash balance plans are a hybrid of defined contribution and defined benefit plans. They are technically defined benefit plans, with many features similar to defined contribution plans.
The value of a cash balance plan is usually expressed in statements as a “cash balance” because they show an exact dollar amount in an account for a particular employee.
However, participants earn “interest credits” periodically during their participation in the plan. Many divorce attorneys treat cash balance plans just like defined contribution plans for purposes of settlement, only to find that cash balance plans are not as easily divided as defined contribution plans.
Cash balance plans seem to be the most common form of “hybrid” plan, but there are also other types of hybrid plans that have their own quirks.
The distinction between the types of plans is critical to understanding what payments will be in the future or if an account balance will fluctuate due to external factors.
Learn more: How are Cash Balance Plans Divided in a Divorce
QDRO Mistake #2: Not Setting a Clear Division Date
One sure fire way to increase the chances of litigation is to not set a precise date the division of retirement assets. Make sure that there is always a clear date when funds are to be separated. It can be as simple as “Wife is awarded one-half account balance as of May 26, 2018” or whatever date is agreed upon. This can be the date of separation, date of divorce, date of retirement or any other date that both parties agree to.
An example of where you could run into a disagreement without a firm date that has been stated is in a defined contribution plan, if the investment vehicle (such as the stock market) spikes during a certain period, and the account jumps in value, the parties may fight over which date of division should be used. There could be large sums of money at stake depending on the outcome.
One option to avoid this is to have a spouse awarded a specific dollar amount instead of a percentage of a retirement plan. Agreeing to give a spouse $500,000 instead of “half of the retirement plan” will also head off litigation and means that the date of division is no longer a relevant factor.
QDRO Mistake #3: Awarding a Flat Dollar Amount Without Doing a Risk Assessment
Flat dollar amounts from defined contribution plans to a spouse has created agonizing results when account values fall during a financial downturn.
For example, if a spouse agrees to give the other spouse $500,000 when an account is valued at $1 million, if there is a downturn in the value of the account due to market conditions, the spouse who owns the account will still have to pay the other spouse $500,000 even if the account is now worth only $850,000.
This is because no provision has been made to adjust the spouse’s amount to account for earnings or losses. Conversely, if the spouse of the account holder agrees to $500,000 and the account grows to $1.2 million, then they are being shortchanged by perhaps $100,000 out of the additional $200,000 in growth.
If you negotiate a flat dollar amount, you need to understand this risk and only agree to it if there are sufficient funds to handle an award even if the account value drops significantly. Attorneys will generally document the fact that these risks have been explained to a client when there is an insistence that a flat dollar amount method is used.
It is good practice with any retirement account to insist that the employee spouse transfer the funds into a stable value fund while the divorce and QDRO are pending. If this option is available, this is the best way to preserve the amount of the account, at least until the QDRO has been executed.
QDRO Mistake #4: Not Addressing Earnings and Losses in a Defined Contribution Plan
There is normally a delay of several months from the agreed-upon date of division and when the funds in a defined contribution plan are actually divided.
This means the amount in the account on the agreed-upon date of division could be substantially different that the amount in the account when the plan funds are actually divided.
One spouse or the other could take a hit depending on if there are earnings or losses that take place during that interim period.
An account worth $1 million could gain or lose $50,000 during that period. If there is no specification as to what happens to earnings or losses that is built into the terms of the QDRO, it can lead to litigation.
If a spouse agrees on a specific dollar amount or percentage of the account as of a certain date, with no adjustment for earnings and losses, then the employee spouse is going to bear all of the potential risk of the value falling.
If the market goes up dramatically, he/she may be very happy. But if it goes down, he/she may resent having to transfer $50,000 to an ex-spouse, because this now represents a greater percentage of the total account balance. Conversely, the spouse will be happy with her guaranteed $50,000 if the market falls, but unhappy that she is not getting a share of the gains if the market goes up.
If a percentage is agreed upon, then a provision along the lines of “including investment earnings and/or losses on that amount from that date until the date the funds are completely distributed to the wife/husband,” should be added to the QDRO.
Even if the account is not actually divided for several years, each spouse will still get exactly what he or she would have received if the account had been divided on the agreed-upon date of division.
QDRO Mistake #5: Not Preparing the QDRO in a Timely Manner
Ideally, a QDRO should be prepared as soon as both sides have reached a basic settlement agreement regarding how the retirement funds should be divided. When this happens, a QDRO can be filed at the same time as the overall Final Settlement Agreement. If this is not possible, it should be filed as soon as possible after the divorce is finalized.
If this does not happen in a timely manner the alternate payee is putting themselves at risk to lose his or her benefits under a number of scenarios:
- A participant terminates employment and takes a full plan distribution under a defined contribution plan
- A participant retires and starts drawing benefits without notifying the alternate payee
- A participant dies without a QDRO in place that locks in survivor benefits for the alternate payee
- A participant takes a loan out that significantly reduces the account balance available for division pursuant to a QDRO
Another problem that can come up is when a plan changes administrators when parties wait to draft a QDRO. When a new plan administrator takes over, they will usually not perform any calculations regarding benefits accrued prior to their plan administration date.
This can create significant problems if the parties do not have their own plan statements for the time period from the date of marriage to date of separation. It means that they will need to retain an actuary or accountant to perform a calculation to determine the community property interest in the benefits.
QDRO Mistake #6: Trusting a Model QDRO Without Doing Any Due Diligence
Unfortunately, there are some attorneys or QDRO prep services that will draft your QDRO by taking a template or “model” QDRO and simply inserting the parties names and other basic information without closely scrutinizing the document for any needed revisions.
This should never be done unless an attorney and the client fully understand every provision in the document based on the laws of the state where the QDRO is executed.
This is because most model QDROs are drafted to favor the plan participant at the expense of the alternate payee. Model orders can heavily favor the participant with regard to issues like investment earnings and losses, and survivor benefits. A model QDRO may have also been drafted in a different state than where the divorce took place, and that can definitely have an impact on how benefits are divided.
For example, in California, the community property interest stops accruing on the date of separation. But other states may use other dates. This might be the date of the divorce filing, or the date of the entry of Judgment of Dissolution, both of which may be years after the date of separation.
QDRO Mistake #7: Not Taking Loan Balances into Account
Loan balances on defined contribution plans are often overlooked when preparing a QDRO and settlement agreements.
What makes things more complicated is that in most plans, an outstanding loan is considered an asset that should be added to the total balance to determine the full value of the account. But most plans cannot award any portion of a loan balance through a QDRO.
It’s important to protect against a loan balance surprise by including language in the QDRO that prohibits the employee spouse from taking any funds out of the account until the other spouse receives the amount awarded under the QDRO.
If there is a concern that the employee spouse will attempt to remove funds from the account through a loan or recklessly alter the investments in the account, or take other actions to reduce its value before the QDRO can be completed, an attorney should notify the plan administrator that a QDRO is being prepared and to ask the account to be placed on hold.
You should strongly consider filing a joinder at the start of the divorce process. A joinder adds the retirement plan or pension plan as a party to the divorce proceedings.
By doing so, you can place restrictions that prevent the company from making any benefit payments to the account owner. This essentially freezes the plan until you are able to sort through the issues and reach on agreement on how you’re dividing the retirement plan.
Some plans will place a hold immediately but other administrators won’t implement a hold until an actual QDRO is submitted. It may be possible to submit a skeleton QDRO which is just a place holder that is submitted as a draft to trigger the hold under the terms of the plan.
It’s a good practice to list the most current account balance so that everyone has the same understanding of what the balance is at the time of the agreement.
In cases where a spouse will receive 100% of a defined contribution plan, it’s important to know if there is an outstanding loan balance because the plan will generally not transfer a loan to the non-employee spouse.
QDRO Mistake #8: Not Assigning Responsibility for Who is Going to Draft the QDRO
As silly as it may seem, one of the most basic functions of drafting a QDRO is sometimes overlooked.
When it is not specifically spelled out who is going to draft the QDRO, it can and does very easily fall through the cracks and never gets done. Each attorney may assume the other is drafting the document and vice versa, and then as time passes it is completely forgotten.
Some attorneys will buy into the fact that if it’s their client who is having his retirement account divided, he or she should not have to worry if it gets done. They only care that their client will get their money because their name is already on the account. This is completely wrong thinking.
That’s because an attorney is supposed to protect a client from future claims as part of his duties. An attorney could leave their client’s estate with costly litigation if it is later found that the QDRO was never executed. A claim could be put in that could decimate an estate long after the fact.
It should be made clear that one side will prepare the QDRO and the other side will have the opportunity to review the document before submission. This assigns duties to both sides making it less likely that it will be forgotten.
QDRO Mistake #9: Failing to Disclose QDRO Processing Fees
The Department of Labor allows retirement plans to charge fees that can be taken directly from an employee’s account to offset costs of processing QDROs.
Plan Administrators can charge more if their QDRO form is not used or if it is rejected for any reason after submission.
These fees currently range from about $300 to $1800 per QDRO.
It’s smart to get this information in advance so that a draft agreement can be prepared in a way that will permit the use the Plan’s QDRO form and avoid additional fees. It will also allow for full disclosure because those fees can be incorporated as part of the QDRO agreement.
In many cases, these fees can be divided equally between the parties if specified in the QDRO.
QDRO Mistake #10: Not Making Provisions for Surviving Spouse Issues
There are some instances when a settlement agreement does not adequately address pre- and post-retirement surviving spouse coverage.
This is especially important for defined benefit plans where a number of issues can make this the most complicated part of preparing an airtight QDRO.
Attorneys should at least consider whether the alternate payee is to be treated as the surviving spouse if the employee dies before the transfer under the QDRO is completed. For a defined contribution plan, this can be as simple as making it clear that the alternate payee is entitled to receive the funds to be awarded regardless of when the participant dies.
In defined benefit plans, the surviving spouse benefit is substantially affected by whether the employee spouse dies before or after the start of benefit payments. Both situations must be addressed in the QDRO.
In many defined benefit plans, the alternate payee will receive no benefits if the participant dies before payments begin. However, payments are allowable if the alternate payee has been designated as the surviving spouse for purposes of the Qualified Pre-Retirement Survivor Benefit (QPSA).
A QDRO should also clarify whether the alternate payee is supposed to be the surviving spouse for the participant’s entire benefit, or just for the portion of the benefit to be awarded. This will also affect the participant’s ability to leave a survivor benefit to any subsequent spouse.
The issues and the exact language are very specific and detailed regarding this, and it is critical to make sure that a party’s interests are well protected by effective language in the QDRO.
QDRO Mistake #11: Failing to Implement the QDRO
Even if a rock-solid QDRO has been drafted, it does zero good if you do not actually follow through with the elements of the plan.
Do not ever assume someone else is handling it if it’s your financial health and bottom line that is on the line. Do not ever close out a QDRO without obtaining some kind of verification from a plan administrator that the QDRO has been received and will be implemented accordingly.
Some approval letters from the plan simply state that the QDRO has been received and approved as qualified. Other formal approval letters are extremely detailed and set forth the plan administrator’s interpretation of each provision of the QDRO.
It is very important to read any correspondence carefully and compare them with the text of the actual QDRO. Errors can and do happen. These errors are often substantial and can affect surviving spouse benefits. If you don’t read the approval letter carefully and don’t identify an error, you may not be able to fix the error down the road, if and when it is discovered.
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