What is a QDRO and When Do You Need One?

One of the biggest assets in a marital estate is a party’s retirement plan or pension.

In a California divorce, all assets of the marriage, including retirement plans, will be divided. The non-participant spouse is entitled to receive a portion of the retirement plan that was accrued throughout the marriage. The division of the retirement plan assets is documented through a court-ordered QDRO.

What is a QDRO?

Once the division of the retirement plan has been agreed upon or ordered by the court, a Qualified Domestic Relations Order (QDRO) is the specific order of the court directing the retirement plan to assign or pay an amount, a percentage, or a portion of a retirement plan to a person other than the plan participant, such as a former spouse or a dependent.

Although QDROs are most frequently used in divorce cases to divide the community property portion of a retirement plan, QDROs may be used to pay child support or spousal support to a spouse, former spouse, child, or other dependent of the plan participant.

Not all retirement plans require a QDRO. An Individual Retirement Account (IRA) can usually be divided by a rollover through the financial institution.

However, retirement plans such as 401(k) plans, 403(b) plans, 457 plans, employee stock ownership plans, and defined benefit plans do require a QDRO. The language dividing the retirement plan is not sufficient to meet the requirements for a plan to divide up a retirement plan incident to a divorce.

When Do I Need a QDRO?

Once the division of the retirement plan has been agreed upon by the parties or decided by the court, it is imperative that you file a QDRO as soon as possible.

A QDRO is a separate order from the Judgment or the Marital Settlement Agreement. The QDRO is the document that notifies and instructs a retirement plan on how the assets in the plan or the benefits of the plan, will be divided. The QDRO helps ensure that both parties get equal shares (or the agreed upon portion) of money or benefits from the retirement plan that were accumulated during the marriage. 

Without a QDRO, the retirement plan may not even be aware that a divorce occurred or that a former spouse is to receive a portion or percentage of the plan, or plan benefits.

If the retirement is not aware of the divorce or court orders, then the retirement plan might unknowingly pay all monies or benefits to the plan participant without allocating any funds or benefits to the former spouse.

Even worse, if the participating spouse were to die before the QDRO is completed, the former spouse may not be able to recover her or his share of the retirement plan.

QDRO Distribution Options

The retirement plan may allow for different options as to how a nonparticipating party’s share of the retirement plan is distributed. Each retirement plan is different, and the QDRO needs to be tailored to comply with the retirement plan’s rules and distribution options.

Distribution options may include:

• Lump Sum Payment.
  
  • A distribution may be allowed to occur as lump sum payment for the percentage of assets in the plan. In this case, the party choosing the lump sum option would be required to pay income taxes on that specific distribution. There may also be a 10% penalty if the party receiving the lump sum payment is under 59.5 years of age.
    
• Transfer to Another Retirement Account.
  
  • Another possible distribution option is for transferring the portion, percentage, or share of the retirement funds into a separate retirement account. A party choosing the transfer option may avoid paying income taxes and penalties on it at the time of the QDRO.
    
• Installment Payments.
  
  • Installment payments may also be considered. The benefit of installment payments is that this route reduces the tax burden of a larger one-time lump sum payout. Again, a 10% penalty will apply if the party receiving installment payments is under 59.5 years of age.
    
• Leave the Money Where It Is.
  
  • A party may be allowed to leave the money where it is but the QDRO may be drafted to allow that party permission to invest their portion as they wish as an alternate payee.

QDRO 401(k) FAQs

• When should I consider a QDRO?
  • Spousal beneficiaries should consider drafting and filing a QDRO during the divorce proceedings.

• Who is responsible for filing a QDRO?
  • Unless otherwise agreed, the qualifying beneficiary spouse is usually responsible for filing the QDRO. The participating spouse typically does not file.

• How long after divorce can you file a QDRO?
  • There is no time limit for filing a QDRO after a divorce, but sooner is better to ensure your interest in the retirement plan goes to you.

• How do I write a QDRO?
  • Start by reading the plan summary to understand the entirety of the retirement finances. Some retirement plans have sample QDRO language, but it often needs to be tailored to correspond with the agreement or the court order for the division of the retirement plan. 
  • After the QDRO has been drafted, send it to the retirement plan’s administrator for pre-approval. Make any required revisions required by the plan and resubmit the QDRO for subsequent review. 
  • Once the retirement plan has been approved, sign and submit the QDRO to the court for filing, and then provide a certified copy of the QDRO to the retirement plan administrator.

• How is a QDRO calculated?
  • Typically, funds and benefits accumulated during the marriage are split 50/50. However, if your spouse already had funds in the account prior to your marriage, then you’re likely not entitled to a portion of the funds or benefits that existed prior to marriage.

Let the Experts Help You Finalize a QDRO

QDROs are complicated. Contact Cage & Miles to work with our team of experienced family law attorneys. We will help you navigate the QRDO process to prevent any costly mistakes.