QDRO stands for Qualified Domestic Relations Order, which is a court-ordered document used to split certain types of retirement plans during divorce. It is essential that you know the details of what a QDRO covers, because it is not necessarily a given in every divorce.
When Do You Need a QDRO?
First, you need to establish whether or not you are entitled to a share of your spouse’s pension or retirement accounts. From there, you need to know the specifics about these accounts. For example, you will need a QDRO if you are trying to divide a 401(k), 403(b), or pension plan. You will also need this order for any other type of employer-sponsored retirement plan, including civil service plans or IRAs (federal and state).
Individuals with income exclusions can apply for QDROs as well. The most notable examples are government and military pensions.
The spouse who owns the plan is called the “participant.” Meanwhile, the non-employee spouse is called the “alternate payee.” The QDRO form tells the sponsor of the retirement plan (sometimes referred to as a “plan administrator”) how to divide the plan if a divorce occurs. Without a QDRO, the alternate payee cannot legally access the funds in a retirement plan.
A QDRO is necessary if you were awarded a share in your spouse’s retirement or pension funds during the divorce proceeding through settlement or litigation. It is the only effective way to notify a plan administrator, and ensure that you receive the funds.
In the event that a spouse does not (or cannot) pay child or spousal support as dictated in the divorce decree, a QDRO can also be used to pull money from retirement accounts, in order to cover these expenses. This situation is much trickier than usual, so you should be certain to understand the tax implications. In spousal support, the recipient assumes tax liability, but child support is the opposite.
At some point, individuals will be faced with deciding whether or not a QDRO is truly a worthwhile pursuit. Is the cost of drafting and filing this order worth the amount of money at stake? Small account balances generally are not worth the headache involved. More convenient arrangements may be made, including transferring funds to an IRA for the alternate payee. You can also make some other form of a lump-sum payment.
A QDRO Form Must Contain Certain Information
QDROs are complex, since every retirement plan has different rules and procedures. However, there are four key areas that every QDRO requires:
1) Name, Social Security Number, and Current Address of the Participant (plan owner) and the Alternate Payee (non-employee spouse)
2) Exact name of the plan that is being divided
3) The way that the benefits will be divided
At its core, the items seem straightforward, but there are a lot of nuances involved.
How Long Does a QDRO Take?
Obtaining a QDRO can be quite time-consuming, so be certain to understand each of the basic steps prior to beginning. The first stage may be relatively easy. You will gather all of the information that is necessary for the order, including:
- The name of the plan
- The name of the plan administrator
- A copy of the summary of the plan
- Their QDRO procedures
Each plan administrator will have a different way of going about a QDRO.
Next, you will hire a QDRO company or attorney to draft your paperwork. Most situations will require you to submit the draft to the plan administrator for preapproval. The plan administrator will review it, and request any necessary changes. Note that government and military pensions do not usually follow this step.
Preapproval is desirable, because it often speeds up the process of receiving final approval. Once the order makes it through the court system and receives the judge’s endorsement, it is far more likely that the plan administrator will have no issues.
After preapproval, all parties will need to sign the preapproved QDRO, including your spouse. A spouse may refuse to sign the order, but you can file a motion with the court to maneuver around this obstacle.
Finally, a judge will approve the final QDRO, and file it with the court system. Your QDRO company or attorney will need to send an official copy to the plan administrator, in order for you to receive the funds.
From start to finish, this process typically lasts anywhere from two to six months. Depending on the specifics of your order, some companies will take significantly less time.
How Much Does a QDRO Cost?
A QDRO costs around $400-$1,000, depending on the state you live in and the QDRO attorney you use to draft the plan. Also know that plan sponsors may charge a fee for dividing the QDRO, which can range from $300 to $1,200. The price depends largely on the specific account and plan administrator, including the simplicity of the process for your QDRO company or attorney.
Common QDRO Mistakes
1) Not specifying plan names, types, and dates
Within settlement agreements, common mistakes involve forgetting specifics, and being too erroneous while drafting up the QDRO. If you simply refer to a vague “retirement account” and an unspecified “lump sum,” you will leave too much room for interpretation. So one spouse could argue that the sole intent of the QDRO was to split your 401K account—not your pension plan.
The order should also set a clear date for dividing each account. It is critical to be as clear as possible, so that neither party can argue about the intention later.
2) Attempting to divide an indivisible plan
Specifying the plan type is also a crucial component of determining whether a plan can be divided. Too often, QDROs are drafted that attempt to divvy up a plan that is indivisible. The only plans that fall under the Employee Retirement Income Security Act (ERISA) of 1974 qualify. And all retirement benefits are not required to follow these guidelines.
Non-ERISA plan (such as supplemental and excess benefit plans) are not subject to division by a QDRO. Additionally, many of these “golden handcuff” plans do not include survivor benefits. And they terminate the moment the employee passes away. To avoid future litigation, it is critical that you and your attorneys know the type of plan before any settlement agreements take place.
3) Forgetting to address gains and losses
A defined contribution plan (such as a 401K) fluctuates with the market. From the date the agreement was signed, payouts for qualified plans can take upwards of 90 days. Therefore, it is important to address whether gains and losses will affect the dispersed sum.
The gross dollar value of the plan is almost guaranteed to change. How much it changes depends on the amount invested. In the agreement, make sure to indicate whether the amount dispersed will reflect those gains and losses, or will remain stagnant after the date of signing.
4) Not considering tax implications during division
All plan types are not equal. When dividing assets and retirement accounts, understand the tax implications that come along with each of them. In the case of a pre-tax account (such as a 401K), the government will be entitled to its share when it is taken out during retirement. In contrast, an after-tax account (such as a Roth IRA) is not deducted upon withdrawal.
For instance, a divorcing couple may agree to split a 401k and a Roth IRA that are equal amounts. Then the spouse receiving the Roth IRA will gain more, since that money will not be taxed. To avoid being short-changed, make sure you understand the tax implications during the settlement.
5) Disregarding a loan balance
If a loan balance exists on a defined contribution plan, it must be addressed in the QDRO. Should the loan balance amount to more than the entitled payout, the account will have insufficient funds.
Perhaps a loan balance has been worked into the QDRO, but there are recurring repayments on it. If so, the document needs to define whether or not the payment sum will reflect the loan balance on the date of signing (or the date of division).
6) Failing to get a QDRO pre-approved
If QDRO forms and retirement plans are complicated, you can impair yourself. For example, you have agreed to a legally impossible division of a retirement plan in your divorce decree. To change the division after the fact, it could potentially cause months of delaysand thousands of dollars in legal expenses.
How do you prevent this scenario from occurring? Get your QDRO preapproved before finalizing your divorce. By contacting the plan sponsor in advance, you can avoid costly delays in splitting a retirement plan.
Use a QDRO Attorney for Help
Drafting and filing a QDRO is outside the realm of what most individuals could or should consider doing on their own. These forms are highly specialized, and require deep technical knowledge that will require a specially trained attorney or company. When it comes to drafting and filing your order, how do you decide who to hire to draft and file your order?
Some cases may allow you to hire your divorce attorney to draft your QDRO after the divorce is finalized. However, you should truly consider your attorney’s area of expertise. In many cases, these forms are beyond the skillset of most divorce attorneys, so you will require the assistance of a specialist.
Hiring someone extremely familiar with QUDROs can sometimes mean lower fees and a more streamlined process. Because of the technical nature of a QDRO, simple mistakes made by an inexperienced attorney can result in multiple trips to court, in order to correct them. Each trip ensures that your bottom line is steadily increasing.
Companies who specialize in QDROs frequently have packages available, which make your expense clear-cut from the beginning. Most individuals prefer this method, compared to a system of hourly billing that most attorneys use. An attorney who bills by the hour can lead to a higher out-of-pocket costs—if the QDRO is more complicated, or requires more time than anticipated.
Furthermore, companies usually offer a more streamlined process with faster turnaround times. Some promise a turnaround time that is as short as seven to ten business days.
Here are some of the companies that specialize in drafting a QDRO.
QDRO Solutions is based in Mt. Pleasant, South Carolina. It is one of the top firms in the United States for drafting QDROs. In fact, their founder wrote The Complete QDRO Handbook: Dividing ERISA, Military, and Civil Service Pensions and Collecting Child Support from Employee Benefit Plans.
There are multiple firms that use the name QDRO Consultants:
1. QDRO Consultants Ohio
There is a QDRO Consultants firm based in Medina, OH. While the information about their team is not clear, members of the firm have authored two books: Dividing Pensions in Divorce and Value of Pensions in Divorce. This Ohio-based firm also has a website dedicated to attorneys at https://www.qdrodrafting.com.
At the moment, they offer a turnaround time for QDRO forms of 7-12 business days.
2. QDRO Consultants Nevada
There is also a QDRO Consultants based in Reno, NV, which is owned by Melinda C. Cameron. The firm has a very clean website, which describes the drafting process. They offer a QDRO that costs $725, and they also have packages for initial consultations.
3. QDRO Express
QDRO Express is based in Taylor, Michigan. Owned by Robert Treat, the firm specializes in QDROs in Michigan and Ohio, but it also works nationally. Their QDRO fees start at $500, and increase from there.