When you are going through a divorce, one of the major considerations is how to divide assets. This is often an incredibly complex and difficult process, which can be made even more complex when there is a retirement account involved. Retirement accounts, such as 401(k)s, can be subject to a Qualified Domestic Relations Order (QDRO), which is an order issued by a court. The purpose of a QDRO is to divide the assets of the retirement account in a way that is equitable to both parties. Given the complexity of the process, many divorcing couples wonder if they always need a QDRO. This blog post will provide an overview of the process and the types of retirement accounts that require a QDRO, so you can determine if this is the best option for you.
- What is a QDRO?
A Qualified Domestic Relations Order (QDRO) is a court order that sets out the rights of an alternate payee to receive all or a portion of the benefits in a retirement plan. It is used to divide retirement plan assets between a participant and their former spouse, partner, or child. A QDRO is necessary when a couple divorces and the court orders that part of the retirement plan be divided as marital property or used to pay spousal support or child support. Without a QDRO, the plan administrator may not recognize the court’s decision.
- When is a QDRO necessary?
Generally speaking, a QDRO is necessary when one of the parties in a divorce has a retirement plan (other than an IRA) that they need to split up in order to divide the assets according to the divorce decree. A QDRO is required to ensure that the assets are properly divided and that both parties have legal rights to their portion of the plan. Without a QDRO, most retirement plan administrators will refuse to split the funds and if the funds are withdrawn, taxes and early withdrawal penalties are a near certainty..
- What information must be included in a QDRO?
A QDRO will typically include the name of the retirement plan, the name of the parties, language instructing the retirement plan on how the plan should be divided, and a whole lot of boilerplate. The boilerplate (standard contract terms that get dropped into every QDRO) gives the court power to issue additional orders if needed, instructs the parties to return any accidentally paid funds to the plan, and protects the plan from having to pay anymore after the QDRO than they would before the QDRO.
In a pension QDRO, the plan may be divided by a coverture formula (known also as the time rule). This is the most common pension division method and every state has a different nickname for it, such as the Majuskas or Brown formulas. In this formula, the service credit accrued during the marriage is treated as a fraction of the overall career, then divided by two. The resulting percentage is multiplied by the final pension amount of the employee, to give each party their respective shares. This time rule will ensure that the nonemployee spouse’s share continues to gain some value while they wait for retirement, but that their percentage continues to shrink as the employee spouse accrues more service time outside of the marriage. While the time rule is the most common division, it is not the only option — some parties elect for a fixed dollar amount on a monthly basis (for example, $500 per month), with or without a right to further cost-of-living adjustments as the years go by.
In a deferred compensation (401(k)) account, accounts are typically split by percentage or by a fixed dollar amount. The percentage is usually 50% to each party. Or if the parties have agreed on some other calculations, the order might have a fixed dollar amount. Keep in mind that even fixed dollar amounts may not be fixed — plenty of courts across the country have held that that dollar amount needs to be adjusted for stock market performance between the divorce and the time the money is paid out, so if the market goes up, the nonemployee spouse’s “fixed” dollar amount will actually be higher, and conversely they can lose money if the market tanks while they are waiting on their order. Lastly, premarital shares should not be overlooked. If the employee contributed to the account before marriage, that premarital contribution is typically considered separate property and it needs to be assigned to the employee only — typically with stock market performance adjustments to bring it to present day value.
- What are the consequences of not having a QDRO?
Not having a QDRO can have serious and costly consequences for both the employee and the employer. Without a QDRO, the employee’s retirement plan will not be able to divide the assets between the employee and their former partner.
For the employee, they most often call a QDRO lawyer for help when they go to retire and find out that their retirement plan is frozen and that they can’t retire without a QDRO. And for the non-employee spouse, if they do not get a QDRO, they risk losing everything if the employee dies or cashes the account out. Even if the employee doesn’t cash out or pass away, records are often lost when the retirement plan switches banks, meaning a wait to do the order could mean you are working off of no records and have to hire an accountant for an expensive analysis.
- How to obtain a QDRO?
If you need to obtain a Qualified Domestic Relations Order (QDRO), the process is quite simple, though slow. First, a draft order needs to be prepared. It is best if these orders are prepared by a licensed attorney that regularly handles QDRO work, rather than a general family law attorney or worse, a non-lawyer consultant or paralegal. Once this order is drafted, it needs to be sent to the retirement plan for a review called “preapproval.” Pre-approval ensures that if all parties sign, that the retirement plan can and will accept the order and divide the accounts accordingly. Once you have a pre-approval, the party should sign and submit the order to court. Once the court signs, the order has to go back to the retirement plan for final division. The final division of the retirement account can take anywhere between a couple of weeks and a few months.
Most lawyers who handle this type of work will do so on a full-service basis for a fixed fee. This means they will handle all of the drafting, preapprovals, signatures, filing with the courts, and returning the order to the plan. The fixed fee means no surprise bills.
If you have been divorced and are looking at retirement or need to access your retirement funds, you may be wondering if you need a QDRO. We offer a free 15-minute consultation to answer your questions and see if you need help, and if we are a good fit. Get started today and schedule your free consultation.