What Is QDRO
(Qualified Domestic Relations Order)?
Even while you’re going through the difficulty of a divorce, you need to make informed financial decisions regarding the division of the property that you and your spouse have accumulated during your marriage. Retirement savings are one of the largest assets many people own, and therefore are an important issue in divorce proceedings. If you’re planning to get a separation or divorce and your spouse has an employer-sponsored retirement plan such as a 401(k) or pension plan, you’re legally entitled to part of the balance. But how do you protect your share? What’s to stop your spouse’s employer from paying out the benefits to your spouse or ex-spouse, leaving you with little or nothing? A Qualified Domestic Relations Order (QDRO, pronounced “quad row”) can protect your interests. A QDRO is a court order, judgment, or decree related to child support, alimony, or property rights, that instructs your spouse’s pension plan on how to pay you your share of plan benefits. QDROs only apply to plans that are IRS tax-qualified and covered by the Employee Retirement Income Security Act (ERISA). They do not apply to military or government pensions, which are governed by other laws. A QDRO gives you protection that a marital settlement agreement does not, so don’t assume you’re covered just because your divorce decree states that you have a right to part of your spouse’s retirement funds.
A Domestic Relations Order is not considered Qualified unless it’s been approved by the retirement plan’s Plan Administrator and the court. Retirement plans often have standard QDRO forms that your lawyer can use to draft the wording of the QDRO. Sometimes these are adequate, but if your share of your spouse’s retirement account is substantial, you should consider using an attorney who specializes in QDROs to ensure that all of the related issues in your marital settlement agreement are incorporated into the QDRO and that your rights are fully protected in a way that a generic QDRO form can’t provide. If your attorney is not experienced in QDROs it will take him or her longer to do the research and paperwork, which will cost you more in legal fees. There’s also the chance that he or she could miss something important that could end up costing you money. The validity of the QDRO must follow certain guidelines set up by the pension plan administrator. Not all court orders are considered qualified domestic relations orders. The plan administrator will make the decision as to whether or not the QDRO qualifies. If your spouse is covered by a defined contribution plan, like a 401(k) plan, the timing of your payment depends on that particular plan. Some plans make an immediate lump sum pay out and others pay a lump sum in the future or make periodic payments. If your spouse is covered by a defined benefit plan like a company pension plan, you would receive monthly payments starting at your normal retirement age.
Since your ex becomes entitled to this money, he/she will also be responsible for paying the related income taxes when that money is received in the form of a pension, annuity or withdrawals. In effect, your ex becomes a co-beneficiary of your existing qualified plan pension account. Also, the QDRO arrangement permits your ex to withdraw his/her share and roll the money over into his or her own IRA to the extent current withdrawals are permitted by the terms of the qualified retirement plan. The IRA rollover procedure allows your ex to take over management of the money while continuing to postpone taxes until funds are withdrawn from the IRA. Once again, the important point from your perspective is that your ex will be the one who owes the taxes.
What happens when your qualified retirement account money goes to your ex without a QDRO?
You will need to check with your accountant for the full details, but typically it’s treated as a taxable distribution to you. This means you likely owe the IRS for money that actually winds up in your ex’s pocket. Your ex will love this, because it’s a tax-free windfall at your expense. On top of the income tax bill, you may also get stung with the 10% premature withdrawal penalty if you are under age 59 1/2. This just adds insult to injury.
What information do I need to have in my divorce decree?
•· Name and mailing address of the “plan participant” (you) and the “alternate payee” (your ex)
•· Each retirement qualified, plan account to be split up under your divorce.
•· The dollar amount or percentage of benefits to be paid from each account to the alternate payee
•· The number of payments or benefits period covered by the QDRO.
•· Your papers should also specify that a qualified domestic relations order is being established under your state’s domestic relations laws and Section 414(p) of the Internal Revenue Code.
You should consult a tax professional with divorce case experience to make sure all the required bells and whistles get included. Obviously, this must happen before the divorce papers are finalized. Here at Coleman, Chambers & Rogers, LLP we can assist you in preparing your QDRO in your divorce case. We typically charge a separate fee for the drafting of these documents, and the process can take several weeks or months depending on the time frame mandates of the company administering the QDRO. Please call 678-601-2495 for more information.