What Is A QDRO and Do You Need One?
Federal Law requires a QDRO to be in place for certain retirement plans to be divided.
No matter how amicable the split, the effort of going through and fairly splitting assets in a divorce can be a veritable minefield. So much so that people often forget about things like retirement assets and end up paying the price in penalties and taxes later on.
For many people, retirement accounts will be the largest assets to be divided, and it’s vital to understand how this kind of financial apportioning works.
In all cases, it’s best to make sure you have the right information at hand, and to ensure that you are getting the best advice for your situation. We’ve created a guide to highlight areas for to consider when dividing your retirement plan(s) — whether a 401(k), pension plan, or other defined benefit or defined contribution account.
What Is A QDRO?
A QDRO (or “Qualified Domestic Relations Order”) is a type of court order — typically entered in a divorce action — that is a federal requirement to divide certain kinds of plans. They are used to help divide 401(K)s, pension plans, as well as a variety of other types of retirement accounts covered by the federal Employees Retirement Income Security Act, and sometimes even Individual Retirement Accounts (or “IRAs”. If a retirement plan is covered by the Employee Retirement Income Security Act (ERISA), then a QDRO is the only legal way to transfer your share of the fund without the risk of incurring significant taxes and penalties. However, it is important to discuss how you plan to access those funds with a financial advisor or accountant before you do so in order to ensure that you are not accidentally creating a significant tax bill.
According to a 2016 American Academy of Matrimonial Lawyers survey, dividing 401(k)s and similar types of accounts have been ranked as the most contentious item for 62 percent of divorces. For example, one party may suggest a trade in negotiations: trading a house or car in lieu of the other party getting a share in the retirement account. In this case, a QDRO may no longer be needed, but there may be a significant difference in the “cash” value of the car or house and the “pre-tax” value of the retirement account. It is advisable to consult with both an attorney and a financial advisor so that you have expert advice for valuing the assets to be split in your divorce.
When exploring which portion of the benefits are eligible for division, the court will look at the contributions made to the retirement fund throughout the course of the marriage. Typically, the dates will run from the date of the marriage to the date of your separation, or date of divorce. However, this is not uniform across the country — or even within individual states — so it’s important to get accurate advice from an experienced attorney in your jurisdiction.
What does a QDRO Do?
If you withdraw money from your retirement account before you are 59 ½ years old, federal law imposes a 10 percent penalty. There are certain exceptions to this, and one such exception is when a transfer is made during divorce proceedings pursuant to a QDRO.
A QDRO provides protection you when money has to be transferred from your retirement account to your ex-spouse. Not only that, but a QDRO can also provide for survivor benefits should the Participant pass away (in the case of a pension plan). However, if the Participant dies before a QDRO is in place, you may lose any right to your portion of the retirement assets.
As such, timing is critical and it’s important to complete your QDRO as quickly as possible following your divorce.
Get Your Information
If your split is an amicable one, you may find that your former spouse can provide you with all of the information about their retirement assets. However, as a spouse, you do have the legal right to get information about the retirement plan of your former partner. In order to get hold of this, you should contact your attorney or the administrator of the plan to request the necessary information.
It’s good to know the description of the plan (known as a “Summary Plan Description”), the benefit statements, and any other necessary associated documents. Many plans will also provide a sample copy of the plan’s “Model QDRO”. No two plans are identical, but knowing the format that the plan prefers can make life easier down the line.
You may find that your former spouse or the administrator of your spouse’s plan are less than forthcoming about the information you need. If you’re having difficulties finding the contact details for your ex-spouse’s plan provider, the FreeERISA website will help you track down the most recently filed Form 5500, as well as all of the details for who it is you need to talk with. You can also speak with your attorney about your options to help gather the necessary information.
How Is a QDRO Prepared?
Typically, you’ll find that the judge is the one to decide whether or not you’re to be awarded any portion of your former spouse’s retirement assets, or it will be apportioned via settlement. Your attorney can then draft the QDRO to be forwarded to the judge for signature.
The QDRO will then be submitted directly to the plan’s administrator for review and qualification. The order won’t be “qualified” until it has been accepted by the plan administrator. Once accepted, the plan administrator will divide the account at issue into two separate accounts: one in your name, and one in the name of your ex-spouse. The administrator will then provide notices to all interested parties, detailing any available options for rollovers, disbursements, beneficiary elections, etc.
The Takeaway
The best way to ensure that the process is as effortless as possible is to gather all of the information that you need as soon in the divorce process as possible. Initiating the QDRO process during early days of the divorce and/or during settlement negotiations means that the court is likely to be able to finalize the divorce and sign off on the QDRO at very much the same time.
