Qualified Domestic Relations Orders
One of the biggest assets in a divorce is usually the parties’ retirement accounts. This can be a critical asset, especially if one spouse has given up their career to run the household and raise the children. They might be dependent on the retirement earned by their partner throughout the marriage. If the retirement accounts are going to be split, they usually require a qualified domestic relations order or a QDRO.
What is a QDRO?
There are two basic parts to a QDRO – first is the ‘domestic relations’ part, and next is the qualification. It basically assigns a property interest in the 401(k) of your partner as an alternate payee. Most plan administrators will require both a QDRO and the final decree of divorce before awarding any portion of the retirement to you.
Can I Draft my own QDRO?
While you may not always need a lawyer for your divorce, if you plan on dividing a retirement account, it is always better to hire a professional to help you with a QDRO. That is because there is no single kind of order used for the retirement plan. Each retirement plan is different. Each plan administrator will have a different set of rules and procedures when drafting a QDRO. In some cases, larger employers will have an HR department that may have a standard template to fill out; however, there might be special circumstances where you will need specialized knowledge to properly complete the forms. If the QDRO is not drafted properly, it could have a significant impact on any money you are awarded, and it could also take much longer to negotiate with the plan administrator on its terms. It is best to seek out the help of a qualified professional when drafting a QDRO.
What does ‘qualifying’ the order mean?
If a QDRO relates to any employee benefit covered by ERISA (usually any 401(k)), then it must be qualified so that it meets all ERISA requirements. Usually, this means that the participant must be identified in the order, as well as the alternate payee, the plan, the time period applicable, and finally, the dollar amount or percentage of the plan that will be awarded to a party.
How long does it take to finalize a QDRO?
It can take some time. If there are any drafting errors, the plan administrator has the right to reject the order and send it back for further modification. Often, there is some back-and-forth between the administrator and the lawyer before the QDRO is accepted. Once it is accepted, then the administrator can divide the benefits and provide access to the alternate payee’s benefits.
Why do I need a QDRO? Can’t I just give my spouse their share?
Not without incurring significant tax liability or early withdrawal penalties. If a distribution is made from a 401k account, the distribution is taxable to the owner, rather than the beneficiary. Usually there will also be at least a ten percent penalty on any distributions if the account holder withdraws money before a certain time. A QDRO will remove the tax liability and the early withdrawal penalties to the spouse, making it a much better option (at least for the spouse whose retirement is getting divided). It is also beneficial to the alternate payee spouse, even though it does take time to execute. They will receive their benefits directly from the employer, meaning they will not have to rely upon their spouse for payments. It also transfers ownership directly to you, meaning you will have control over the account as though it was always yours. If your spouse wants to hold off on receiving payments, it will not affect you. You can decide when to withdraw at your convenience.
Do I always need a QDRO?
Not always – but that is because QDRO’s do not apply to things like military or government pensions. If you have questions about whether or not your retirement will require a QDRO, the best person to ask is your retirement plan administrator. They will work closely with the lawyer to ensure the QDRO follows their company’s guidelines.
How We Can Help
We have years of experience in ensuring our clients get a fair shake during a divorce. Retirement assets are critical especially for our clients who are nearing the end of their working lives and are looking forward to retirement. We are happy to advise you on the options available for dividing up retirement accounts, and we can ensure all steps are taken to safeguard your share of the marital estate. **CALL TO ACTION.