I say Queewdro; you say Quadro? Attorneys get paid to argue, so it makes sense that they can’t agree on how this divorce acronym is pronounced. The official acronym is QDRO, which is short for Qualified Domestic Relations Order.
So, what exactly is a QDRO?
The IRS definition is: “A QDRO is a judgment, decree or order for a retirement plan to pay child support, alimony or marital property rights to a spouse, former spouse, child or another dependent of a participant.”1
It is a legal document which divides qualified retirement plans during a divorce or orders the use of those assets to provide ongoing maintenance if needed. The beneficiary of such an agreement is known as the alternate payee.
Under federal law, ERISA (The Employee Retirement Income Security Act) covers qualified retirement plans. Some common examples of these retirement benefits include 401(k)s, 403(b)s, and some Pensions. Ironically the Federal retirement programs (TSP, FERS, CSRS, etc.) are not covered by ERISA and have their own rules that apply to splitting those benefits during a divorce.
Why do I need a QUADRO?
Without it, you may not receive a portion of marital property allocated to you in a divorce. Let’s look at an example. Suppose a QDRO is not filed with the courts or the Retirement Plan Administrator does not approve it. In that case, you cannot collect the benefits allocated to you from your ex-spouse’s qualified assets or pension plan.
Your divorce settlement will lay out the terms of your divorce and how the assets will be split. Splitting the assets and assigning the marital property to the appropriate payee is the responsibility of the divorcing parties.
Provisions required by a QDRO are not standardized and will vary based on the type of retirement plan and the purpose of the order. Lack of standardization makes the process more complicated, which can result in the order being rejected by the retirement plan administrators. However, a properly drafted and pre-approved QDRO will help ensure you receive the benefits specified in your divorce settlement.
Who should file the QDRO?
It’s a good idea for the alternate payee to file the QDRO with the help of a QDRO specialist.
There is no incentive for the plan participant who owns the qualified asset or pension to file the QDRO. They could put off that task for years, to the potential detriment of the beneficiary spouse.
Attorneys can draft the orders. However, hiring a specialist may be in your best interest. Your divorce attorney focuses on what needs to be done right away. Drafting QDROs is typically outside your attorney’s top 10 list of things to do. The QDRO specialist will prepare the order for your attorney’s review. And, at the same time, your attorney will work to finalize your settlement.
3 Tips for avoiding QDRO disasters
1. Get your order pre-approved by the Retirement Plan Administrator
Contact the company that administers the asset or plan that needs to be split. They will provide a copy of the Summary Plan Description. The summary plan description contains critical information about the benefits available under the plan. Many administrators also have sample language that can be used when drafting the order.
Once you have this information, the QDRO can be prepared and submitted for approval. A QDRO must comply with ERISA, the domestic relations laws within the state that has jurisdiction, and the guidelines in the Summary Plan Description.
Let’s face it, divorces can be stressful.
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Why would the Retirement Plan Administrator reject a QDRO?
There can be many reasons why QDROs are rejected. Here are a couple of examples.
The divorce settlement states the beneficiary spouse will get a lump sum from the pension to use as a down payment on a house. While some pensions allow lump sum distributions, other pension plans provide a monthly income stream. If it is not allowed, the plan administrator will reject the QDRO even if the court has already approved it.
Another example involves an order that was filed from a previous relationship. An alternate payee cannot receive a benefit when those benefits have already been allocated under an earlier QDRO. The initial QDRO could be in place for a former spouse from a previous divorce. There could also be an existing order to support a dependent child from another relationship.
When a QDRO is rejected, the divorce settlement may have to be renegotiated and amended if it has already been filed with the court. Finding out that a QDRO won’t be accepted before the divorce is final makes the process easier, saves time, and helps avoid additional attorney fees.
2. File the QDRO before the divorce is finalized or as soon as possible.
Most people file documents regarding assets they will take control over immediately, like a 401(k) plan, right away. Although it may not seem urgent, it is just as important to promptly file paperwork for benefits, such as pension plans, that the alternate payee will receive in the future.
On occasion, attorneys get calls from clients they worked with years ago whose ex-spouse is retiring. They just realized the QDRO was never filed, and they’re afraid of losing out on their benefit. In some cases, the client only learned about the retirement plan because one of their kids mentioned it in passing.
In most cases like this, you can still file the paperwork with the courts. However, complications could prevent the alternate payee from ever receiving the benefit they are entitled to. This is one of the reasons why creating and updating a financial plan is so important.
Here are some situations that could prevent you from receiving benefits if you did not file the QDRO promptly.
Your ex-spouse retires and takes a single life annuity because there is no QDRO on file. If the Retirement Plan Administrator does not have a record of a court approved QDRO, they would not know it exists. It is up to the alternate payee to follow up with the Administrator to ensure they have received the court order and accepted the order as it is written.
What if your ex-spouse remarried and subsequently got divorced? If the subsequent spouse gets their QDRO filed before the first spouse, they become the first alternate payee to receive the benefits from the ex-spouse.
What if your ex-spouse passes away before the Plan Administrator approves your order, and you are not designated as the beneficiary on the plan? Or if your ex designated their current spouse as the beneficiary under their pension plan before they passed? Although these situations are unusual, they can result in the loss of benefits for the alternate payee. You may still be able to get your benefit. However, the process will most likely be costly, time-consuming, and stressful.
3. Minimize the number of QDROs needed
Especially in community property states, many people think every asset has to be divided 50/50. This strategy may be the simplest way to divide assets on paper. But it can lead to additional costs and complexities, especially for couples who have worked at several companies during their marriage.
Here’s a simple example: Joe and Sally have been married for 40 years. Joe has a pension from a previous employer and two 401(k)s. Sally has a pension from her current employer and a Rollover IRA from a previous employer. They decided to have a CDFA® run an analysis and look at alternatives for the division of assets.
The combined value of Joe’s retirement assets is $100,000 more than Sally’s. Instead of doing four separate orders (one for each pension and the two 401(k)s), the CDFA recommended only doing one to split the difference. After reviewing the recommendation, Joe, Sally, and their attorneys agree that Joe will give Sally $50,000 from one of his 401(k)s. As a result, they both kept their own pensions and only needed to draft one QDRO.
Conclusion: What is a QDRO or QUADRO in Divorce Planning?
Create a plan with your attorney to ensure the QDROs and all other paperwork required to divide assets are completed promptly. Divorce is a stressful process for most people, with many moving parts. It is not unusual to experience some brain fog during the process.
When interviewing attorneys to handle your divorce, find out their strategy for drafting QDROs and if they are open to using a specialist to manage this part of the divorce. This step is critical, because it ensures you receive all the benefits granted to you in your divorce settlement.