QDRO stands for Qualified Domestic Relations Order. It is a legal document that is completed pursuant to a divorce in order to divide ERISA-governed retirement plans. ERISA stands for Employee Retirement Income Security Act. A QDRO allows a judge presiding over a divorce case to order the division of retirement benefits pursuant to a Separation Agreement or Permanent Orders dividing property in a marital estate. A QDRO allows an individual to receive a direct interest in their former spouse’s retirement plan, almost as if the former spouse had earned the benefits himself or herself. QDROs are only used for qualified plans such as 401(k)s and 403(b)s. Individual retirement accounts (IRA) are not divided with a QDRO as they are not qualified plans.
Although a QDRO can be used to assign funds to a child in situations involving child support, more typically it is used for assigning a portion of a person’s retirement funds to a spouse or ex-spouse as part of the division of marital property in a divorce. A QDRO grants a person known as the “alternate payee” the right to a portion of the retirement benefits that the former spouse (“participant”) earned through an employer-sponsored retirement plan. Funds are transferred from the participant’s retirement account to a retirement account owned by the alternate payee. Funds transferred pursuant to a QDRO are not subject to the typical 10% early withdrawal penalty such that a former spouse can immediately withdraw funds without facing the penalty once the QDRO transfer is complete. This is a tax-free transfer of funds and the owner of the retirement account is not taxed on the transfer. The spouse receiving the funds will also not be taxed as long as the funds are put into another retirement account. However, it is important to note that a former spouse will likely still pay ordinary income taxes on any distribution.
QDROs are very technical documents and it is important that they are drafted correctly. Preparing a QDRO often has less to do with divorce law than understanding the federal law and regulations controlling pensions and retirement, including ERISA, and interpreting each plan’s unique rules. Divorce attorneys often outsource the preparation of QDROs to specialists. However, it is imperative that your divorce attorney understands QDROs, ERISA, and the different rules governing retirement accounts when drafting your Separation Agreement to make sure enough details and proper terms are included in order to prepare a proper QDRO. The attorneys are Smith Balicki Finn Laraway are well versed in QDROs and often draft these documents ourselves. However, we will also work closely with QDRO experts if necessary and beneficial for our clients.
Pensions are another type of retirement plan that often require a QDRO. It is important that a divorce attorney understand the difference between pensions and other retirement plans as a pension is very different from a 401(k), for example. One of the most challenging part of dividing a pension is often allocating survivor benefits. Survivor benefits are often not an issue in the division of a 401(k) or similar pre-tax retirement accounts since the former spouse can receive his or her full share of the account immediately following the divorce. However, for defined benefit pension plans, survivor benefits are important to understand and address. For example, if a retiree dies a year after hitting retirement age, a former spouse’s share of the befits may stop unless survivor benefits have been properly addressed. Survivorship rules are often complicated with major differences between different plans. Some plans limit survivor benefits to single, lump sum options while others provide multiple options. Remarriage by either party can also trigger eligibility issues for survivor benefits under different plans. Therefore, there is no one size fits all when it comes do a QDRO for pension plans.
For some spouses after a divorce, the remote and distant benefit of a QDRO mean that they are often not motivated to obtain yet another legal document or Court Order after enduring the divorce process. However, it is important to get your QDRO done quickly after your divorce is finalized to make sure that you receive all of the property and benefits that you are entitled to. QDROs should typically be filed by the spouse who is receiving their share of the retirement assets. It is important to protect these assets and be sure that they are not be directed elsewhere by the spouse who owns the account. It is critical to establish this protection as soon as possible.
If you have questions about a QDRO or dividing retirement assets pursuant to a divorce, call Smith Balicki Finn Laraway. Our attorneys will explain everything you need to know about how QDROs work.