This was originally published on Divorce and Your Money here.
QDRO stands for Qualified Domestic Relations Order, which is a court-ordered document used to split certain types of retirement plans during divorce. You will need a QDRO if you are trying to divide a 401(k), 403(b), pension plan or other type of employer-sponsored retirement plans. The employee, or owner of the plan, is called the “participant,” while the non-employee spouse is called the “alternate payee.” The QDRO form tells the retirement plan sponsor how to divide the plan in the event of divorce. Without a QDRO, the alternate payee has no legal right to the funds in a retirement plan.
QDROS are complex, as 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 Alternate Payee (non-employee spouse)
2) Exact name of the plan that is being divided
3) How the benefits will be divided
At its core, the items seem straightforward, but there are a lot of nuances involved.
A QDRO costs around $400-$1,000 depending upon your state and which 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 to divide the plan.
Within settlement agreements, common mistakes are forgetting specifics and being too erroneous while drafting up the QDRO. Simply referring to a vague “retirement account” and an unspecified “lump sum” leaves too much room for interpretation: 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 that each account is to be divided. It is critical to be as clear as possible, so that neither party can argue the intention later.
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. Only plans that fall under the Employee Retirement Income Security Act (ERISA) of 1974 qualify, and not all retirement benefits are required to follow these guidelines.
Non-ERISA plan (e.g., 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. To avoid future litigation, it is critical that you and your attorneys know the type of plan before settlement agreements take place.
Defined contribution plans (e.g., a 401K) fluctuate with the market. As payouts for qualified plans can take upwards of 90 days from the date the agreement was signed, 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.
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 (e.g., a 401K) the government will be entitled to its share when it is taken out during retirement. In contrast, an after-tax account (e.g., a Roth IRA) is not deducted upon withdrawal.
In other words, if a divorcing couple is agreeing 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.
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 show 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 the payment sum will reflect the loan balance on the date of signing (or the date of division).
QDRO forms and retirement plans are complicated, and you can impair yourself in a situation where you have agreed to a legally impossible division of a retirement plan in your divorce decree - potentially causing months of delays and thousands of dollars in legal expenses to change after the fact. How do you prevent this from happening? Get your QDRO pre-approved before finalizing your divorce. By contacting the plan sponsor in advance, you can avoid costly delays in splitting a retirement plan.
A QDRO attorney can help ensure that retirement plans are split properly and help you avoid mistakes. A QDRO form is highly specialized and requires deep technical knowledge beyond the purview of most divorce attorneys. You need the help of a specialist. 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, as their founder wrote The Complete QDRO Handbook: Dividing ERISA, Military, and Civil Service Pensions and Collecting Child Support from Employee Benefit Plans. You can learn more about QDRO Solutions in this interview here. [Insert Interview]
There are multiple firms that use the name QDRO Consultants.
There is a QDRO Consultants firm based in Medina, Ohio. 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. The Ohio-based firm also has a website dedicated to attorneys at https://www.qdrodrafting.com/. At the moment, they offer a 7-12 business day turnaround time for QDRO forms.
There is also a QDRO Consultants based in Reno, Nevada, owned by Melinda C. Cameron. The firm has a very clean website describing the drafting process and a QDRO costs $725. They also have packages for initial consultations.
QDRO Express, based in Taylor, Michigan, is owned by Robert Treat. According to the website, the firm specializes in QDROs in Michigan and Ohio, but also works nationally. Their QDRO fees start at $500 and increase from there.