You may hear the acronym “QDRO” used quite a bit in the process of getting a divorce, and for good reason: a qualified domestic relations order (QDRO) may play an important role in your resolution.
Finding a fair settlement utilizing a QDRO as a tool is naturally the goal, but it isn't always easy.
Don't underestimate the plan administrator's power, how QDROs are constructed, or the importance of specificity. Let's take a closer look at these and other considerations.
What is a QDRO?
A qualified domestic relations order is used to split retirement assets like a 401(k), 403(b), a pension plan, and any other employer-sponsored retirement plan.
In short, if a plan is used to save money for an employee’s retirement through their employer, it probably qualifies to be part of the divorce negotiations through the use of a QDRO.
It is important to understand that non-employer sponsored retirement savings accounts, like IRAs, are not divided through a QDRO.
IRAs are split through language written in the divorce decree or separation agreement. A copy is provided to the IRA custodian (such as Fidelity, Schwab, or the like).
There are different tax rules for the handling of IRA assets in a divorce process.
What does a QDRO do?
The amended 1984 ERISA (Employee Retirement Income Security Act) permits retirement and pension plans to make payments from an employee’s account to an alternate payee, such as a spouse, former spouse, child, or other dependent, if awarded as part of a domestic relations action to provide child support, spousal support (alimony), or marital property rights.
In a nutshell: a QDRO creates or recognizes the existence of an alternate payee’s right to receive all or a portion of the benefits payable to an employee participant under a retirement plan. A QDRO can stand alone, or it can be part of a larger divorce settlement.
Generally, one spouse will benefit more from a QDRO than the other.
What must a QDRO include?
In order to be recognized as a qualified domestic relations order under ERISA, the QDRO must contain:
- The name and last known address of the employee plan participant and each alternate payee
- The name of each plan to which the QDRO applies
- The dollar amount or percentage to be paid to the alternate payee
- The number of payments or time line to which the order applies.
A QDRO cannot contain:
- A requirement to provide a payee with any type of benefit not provided for in the plan.
- A requirement to provided increased benefits.
- A requirement of the plan to pay benefits to a payee who is required to pay another alternate payee under another court order determined to be a QDRO
- A requirement to pay benefits to a payee in the form of a qualified joint and survivor annuity for the lives of the current ex-spouse and any subsequent spouse
Getting your “ducks” in order
If you are going through a divorce, each spouse should have their own copies of pertinent documents. This includes your employer’s 401(k) plan documents and your spouse’s 401(k) plan documents. These documents will discuss each plan’s adherence to ERISA rules, as well as the rules for writing a QDRO for that company plan.
QDRO language is required in every plan, and while you don’t have to specifically follow the suggested guidelines in writing your own QDRO, you do need to make sure all the required provisions are touched on. Remember, while many plans may have similar QDRO language, they probably won’t be identical.
The division between separate and marital property
While the QDRO is designed to support an agreeable split of these specific benefits and assets, this split is rarely as easy as 50/50.
After all, in many cases, a spouse could have started working at their position—and contributing to their retirement account—before ever meeting their partner.
Because of this, the assets contributed to the account before marriage can be recognized and differentiated as separate property.
QDROs and the final “say”
Do not underestimate the power of the plan administrator with regards to QDROs.
The retirement plan’s administrator has considerable power: the company plan administrator must sign off on the QDRO. If, for instance, the QDRO is written without taking into consideration the plan outline for QDROs, the plan administrator has the power to reject the QDRO.
This authority even supersedes any judge who has recognized the QDRO as part of a divorce proceeding.
The plan administrator is also entitled to charge a “reasonable fee” for administering a QDRO. That fee is typically not insignificant, and it varies by administrator. You will want to research and determine the fee in advance.
Be specific to your needs
The smallest detail makes a big difference when drafting a QDRO. You will want and need to be specific. For example, entering clauses like “50 percent of spouse’s plan” at the realization of the agreement offers you no protection, should the market—and the plan assets—significantly depreciate in the time between drafting the document and administering it.
In this scenario, specifying 50 percent of the current day’s value or the value on a set date offers you more protection.
You will also want to determine if you need an immediate infusion of cash. If retirement plan assets are part of a division of assets, the QDRO’s alternate payee may ask for an immediate distribution of all or a portion of the money without paying the early withdrawal penalty, which is normally incurred if the recipient is under the age of 59½. You still pay ordinary income taxes on any withdrawal of retirement assets.
If you choose to not take a distribution immediately, but you request to take it later, you will incur ordinary income tax plus a 10% penalty if you are under the age of 59½.
Take the time to consider all aspects of a qualified domestic relations order and how it will pertain to your specific situation.
Research fees and QDRO drafting requirements associated with the plan administrator in question.
Above all: be specific in your immediate and future needs, and follow through. It’s the best way to make a QDRO work for you.