QDRO Meaning: What You May Need During Your Divorce Process
A QDRO is a Qualified Domestic Relations Order. This is simply a document that is drafted and then approved by the Marital Master or Judge to order the division of a financial asset, such as retirement accounts and pensions. QDROs are used to divide assets in a qualified retirement plan during divorce proceedings. This is the document that most financial companies require in order to divide an account. They tend to refuse to split an account based solely on a Divorce Decree as they have very specific requirements that they must follow to split the account correctly and legally.
This is part of the post-divorce process. Divorces don’t just end with the Final Decree being issued. There is generally some follow-up that must be completed, such as updating estate plans, health benefits, refinancing or signing over vehicle titles, etc… This means that if you have an attorney that you paid legal fees to for the divorce, you are likely to have to pay further fees to them for the post-divorce process in order to fully comply with the Final Divorce Decree issued. Just watch your deadlines in the Final Divorce Decree. Many of them state that post-divorce documents and steps must at least be started within 30 or 60 days after the Divorce Decree is issued.
If you’re still navigating the early stages of separation, you may also find it helpful to review these 9 simple steps for getting divorced to better understand the overall process.
Qualified Domestic Relations Order Explained
A Qualified Domestic Relations Order (QDRO) is a crucial legal tool in the divorce process, particularly when it comes to dividing retirement benefits. Essentially, a QDRO is a court order that allows a spouse or former spouse to receive a portion of their partner’s retirement benefits. This is especially important in states like Maryland, where the court has the authority to determine whether pension or retirement benefits are considered marital property and can thus be divided.
The QDRO ensures that the division of these assets is done in accordance with federal law, providing a clear and enforceable method for transferring interest in retirement benefits. Without a QDRO, financial companies typically refuse to split retirement accounts, as they require this specific document to legally and correctly divide the assets. This makes the QDRO an indispensable part of the post-divorce process, ensuring that both parties receive their fair share of retirement benefits.
Key QDRO Requirements for a Valid Divorce Agreement
For a Qualified Domestic Relations Order (QDRO) to be valid and enforceable, it must meet specific requirements set forth by federal and state laws, as well as the rules of the retirement or pension plan in question. Key components of a QDRO include:
- Name and Address of the Plan: The QDRO must clearly identify the retirement plan from which the benefits will be divided.
- Name and Address of the Participant: The plan participant’s details must be included to ensure the correct account is being referenced.
- Name and Address of the Alternate Payee: The alternate payee, typically the spouse or former spouse, must be clearly identified.
- Description of the Benefits: The QDRO must specify the benefits to be assigned, including the type and amount.
- Percentage of Benefits: The order must state the exact percentage or dollar amount of the benefits to be assigned to the alternate payee.
Compliance with these requirements is crucial for the QDRO to be accepted and followed by the retirement plan administrators. This ensures that the division of retirement benefits is executed smoothly and legally.
Benefits of Using a QDRO to Divide Retirement Assets
A Qualified Domestic Relations Order (QDRO) offers several significant benefits during the divorce process. One of the primary advantages is that it provides a clear and enforceable way for a spouse or former spouse to receive a portion of their partner’s retirement benefits. This can be a substantial asset, contributing to financial stability post-divorce.
Additionally, a QDRO can secure survivor benefits for the alternate payee if the plan participant passes away. This ensures that the former spouse continues to receive financial support even after the participant’s death. Moreover, a QDRO can grant access to retirement benefits that the alternate payee might not otherwise be eligible for, such as benefits from a retirement plan that is solely in the participant’s name.
Overall, a QDRO is a powerful tool that helps protect the financial interests of both parties in a divorce, ensuring a fair and equitable division of retirement assets.
Retirement Plans That Require a QDRO After Divorce
A Qualified Domestic Relations Order (QDRO) is typically required for retirement plans that fall under the Employee Retirement Income Security Act of 1974 (ERISA). These plans include:
- Defined Benefit Plans: Traditional pension plans that promise a specific monthly benefit upon retirement.
- Defined Contribution Plans: Plans like 401(k)s where the retirement benefit depends on the contributions made and the performance of the investments.
- 401(k) Plans: Employer-sponsored retirement savings plans.
- 403(b) Plans: Retirement plans for certain employees of public schools and tax-exempt organizations.
- 457 Plans: Deferred compensation plans for government and certain non-government employees.
- Thrift Savings Plans (TSPs): Retirement savings plans for federal employees and members of the uniformed services.
- Individual Retirement Accounts (IRAs): Personal retirement savings accounts.
- Pension Plans: Plans that provide a fixed sum upon retirement.
- Military Retirement Pay: Retirement benefits for military personnel.
It’s important to note that not all retirement plans require a QDRO. For instance, certain government plans or church plans may be exempt from ERISA requirements. Therefore, it’s always best to consult with a qualified professional to determine if a QDRO is necessary for a specific retirement plan. This ensures that all legal requirements are met and that the division of retirement benefits is handled correctly.
How to File and Process: Step by Step
QDROs can be very easy or they can be very complicated depending upon the terms of the Final Divorce Decree and the entity(ies) involved. The nice part is that many companies have a template, but fair warning, not all of them do.
The general process includes contacting the financial company to determine if they have a template or to gain an understanding of the required terms. Then drafting the QDRO using their required terms and filling in the information from the Final Divorce Decree. There is generally some back and forth between the parties and the Company to confirm the draft is accurate and contains all of the requirements.
After that, it is finalized and signed by the parties and then filed with the Court. Once the Marital Master or Judge has approved it, it will then be filed with the Company. The financial company will then split the listed accounts as ordered in the document.
This is a very oversimplified version of the process, but it is a process that you want to be aware of if you are contemplating divorce as this will impact all of the parties involved.
What Happens After Approval and How Funds Are Divided
In general, the company will reach out to the party that is receiving a portion of the funds and review their options with them. Options can include opening an account in their name and transferring the funds into that account, rolling the funds over into a different account, or withdrawing the funds. These assets can be rolled over into another retirement account following a QDRO. Just be aware there may be tax penalties associated with withdrawing the funds. This is where consulting with a tax or divorce trained financial professional prior to making the final decision on what to do with the funds is important.
Depending on the number of accounts that are being divided, there may be a need to be more than one QDRO drafted. An example might be if the Final Divorce Decree states the parties are dividing Party A’s 401k, Roth IRA, and pension and giving Party B a portion of each. That would require a QDRO for each account being divided. Keeping in mind there are different requirements for the division of each type of account.
Who Handles QDROs: Attorney vs Divorce Financial Advisor
There are many attorneys who do not handle QDROs or post-divorce work and as such they refer these remaining processes out to other attorneys or divorce trained financial professionals. You’ll want to be aware of that fact if you retain an attorney to assist you with your divorce.
If you proceed through your divorce through mediation (without an attorney), please be aware that you may need to retain a company that specializes in QDROS or a firm specializing in estate plans to handle your post-divorce matter as many mediators do not assist with post-divorce matters.
Since has experience as a Paralegal in New Hampshire, she more than qualified to assist her clients with simple post-divorce matters, however, in many cases, she finds that it is more efficient to refer the clients to the appropriate professionals who specialize in the required areas.
She always suggests that the parties talk with a QDRO financial advisor to find out how dividing their retirement accounts will affect them prior to actually finalizing their Agreements. Individuals may need to contact the plan administrator for access to the summary plan description and other relevant statements regarding benefits and entitlements.
Case Study: How Poor Planning Can Cost You
worked with one couple a few years ago that came to their agreements and essentially settled their case fairly quickly. They had 6, yes, 6 retirement accounts, including a defined benefit plan, to split between them. I explained the process of dividing the accounts and what the post-divorce process would look like as neither of them was represented by an attorney. I also referred the parties to a CDFA, Certified Divorce Financial Analyst, to review the consequences of the agreed-upon division of their assets and retirement accounts.
They met with the CDFA, who indicated that there would be a pretty hefty tax consequence for dividing the retirement accounts the way they intended to divide them. A qualified domestic relations order (QDRO) is necessary for dividing retirement accounts.
The Parties were adamant that their Agreement was not going to change, so I assisted them in signing and filing the Final Agreement with the Court. I gave them both the names of several companies that handled QDROs and told them to go ahead and schedule their appointments to get things moving while they were waiting for their Final Decree to be issued by the Court. The QDRO ensures that the benefits payable to the alternate payee are properly calculated and distributed. The valuation date used for determining the alternate payee’s award amount is crucial in this process. The plan administrator must be contacted to facilitate the QDRO process.
Why Consulting a Professional Early Can Save You Thousands
Well, 2 months later they contacted me asking to modify their Final Decree as they finally spoke with a QDRO professional, who indicated that they would each be paying thousands of dollars in taxes if they actually moved forward with their account divisions as the Divorce Decree stated. Without a QDRO, the former spouse may not receive their entitled retirement benefit. Federal law governs the division of retirement benefits through QDROs. So, we went back to mediation and re-mediated the division of the retirement accounts, and filed the new Agreement with the Court. This is why I referred them to the CDFA earlier in the process.
I do my best to ensure that my clients are fully aware of not only the divorce process but also what will be coming their way post-divorce so that I can help them save both money and time. It is important to consider survivor benefits when dividing retirement accounts. QDROs can also be used to allocate child support from retirement benefits. Additionally, there is an option of receiving a lump sum payment as part of the QDRO process.
Please keep in mind that I am not an attorney and cannot give legal advice. I suggest that you follow up with a certified legal professional in your state to get the most accurate information.
Next Steps: Find a QDRO Specialist in Your State
If you’re looking for a QDRO specialist in your state, send an email to info@irooze.com and we will connect you with the most appropriate and qualified QDRO specialist.