If you are about to be divorced or legally separated and one of the assets to be divided is a retirement plan, then you most likely need a qualified domestic relations order (“QDRO”) (pronounced “qua'-dro”).
A QDRO is a separate court order that is drafted specifically to divide the account of the retirement plan participant and assign a portion of their benefit awarded to a former spouse, a child, or dependent. Most usually, a QDRO is necessary to enforce the award and is a supplemental order entered after a Decree of Divorce. If the retirement plan is offered through the military or civil service, you cannot receive your former spouse's interest in the retirement benefit that was awarded to you without a QDRO or similar court order. The QDRO must state with particular detail how the retirement benefit is divided and must be consistent with the terms of the retirement plan itself.
Clients will often go with “QDRO specialists” (not lawyers, accountants, or actuaries), who may lack academic credentials or who simply use the model QDROs supplied by plan administrators without reviewing special circumstances. It may very well cost you thousands of dollars in the long run if a mistake goes undetected until the benefits are already allocated. For the most part, only an attorney who has extensive experience in the area of employee benefits law will be qualified to prepare your QDRO.
It is well worth it to hire an attorney with considerable experience in the preparation of QDROs to prepare (or review) your QDRO. The benefit of retaining your own attorney (for the proper protection of your interests) far outweighs the potential cost of failing to receive the benefits you agreed to. Either party to the QDRO is at risk of losing substantial benefits when the QDRO is not properly written. Preparing (or reviewing) these documents in connection with a divorce has to do more with retirement plan/employee benefits law than family law. Little words make a big difference in the world of QDROs, and a QDRO attorney with the correct level of experience working with retirement plans of all types is best qualified to write a QDRO properly. At Moody Brown Law, a Utah law firm, we are those QDRO lawyers.
If you are currently going through the process of a divorce or legal separation, or are thinking about filing for divorce or legal separation, and either you or your spouse is a participant in a retirement plan, contact one of our highly qualified attorneys regarding either the preparation of your QDRO or the review of a QDRO previously prepared to ensure your best interest is protected.
1. What is a Qualified Domestic Relations Order (“QDRO”)?
A QDRO is a specially designed court order that is required for the division of retirement benefits in a family law case.
2. Is a QDRO necessary to divide retirement benefits?
The short answer is “yes.” Federal laws do not permit a retirement plan to distribute retirement benefits to the ex-spouse of an employee without a QDRO. Every qualified plan, including defined benefit plans, ESOPs, 401(k) plans, and profit sharing plans, require a QDRO to divide benefits.
3. What are the general procedures for completing the division of benefits?
Step One: The QDRO attorney will help the parties identify the Plan name and Plan Administrator for the specific benefits that need to be divided. Step Two: The QDRO attorney will prepare a draft QDRO document (which is normally between 5 and 8 pages). Typically this is drafted as a stipulated order assuming the parties are both in agreement with the manner for dividing the benefits. Step Three: The QDRO attorney will mail the draft QDRO to the Plan Administrator and the Plan Administrator will review the draft QDRO to ensure that the order will be “qualified,” complies with the terms of the Plan, and complies with federal laws. The QDRO attorney will modify the draft order to satisfy requests of the Plan Administrator. Step Four: Once the draft QDRO is prequalified, the parties may sign the stipulated QDRO, and the QDRO attorney files the QDRO with the court. Step Five: After the QDRO is filed with the court, the QDRO is served on the Plan Administrator to process the division of benefits. Step Six: The Plan Administrator will mail a letter confirming the QDRO is being processed and/or mail distribution paperwork. The parties will need to complete any final forms required by the Plan Administrator. At this point the QDRO process is complete and the parties can contact the Plan Administrator directly with questions about the benefits and distribution options. The amount of time it takes to complete a QDRO depends on a number of factors, including the availability of data regarding the plan benefits, cooperation of the parties, and review time of the Plan Administrator.
4. Is a QDRO necessary to divide government retirement benefits?
Government retirement benefits, such as Utah Retirement Systems (URS), the federal government (FERS, CSRS, TSP), or the military, are divided using a Domestic Relations Order (“DRO”) which is very similar to a QDRO. The main difference between a QDRO and a DRO is certain federal laws do not apply to government benefits and government plans are not governed by ERISA (a federal law that governs certain aspects of private industry retirement plans). Therefore the order is called a Domestic Relations Order rather than a Qualified Domestic Relations Order.
5. What does the term “Alternate Payee” mean?
The “Alternate Payee” is the nonemployee ex-spouse or dependent of the Plan Participant who receives an assignment of benefits pursuant to a QDRO. When you read the draft QDRO prepared by the QDRO attorney, you will see that the employee who earned the retirement benefits during employment is referred to as the “Participant” and the ex-spouse or dependent of the Plan Participant receiving an assignment of benefits in the QDRO is referred to as the “Alternate Payee.”
6. What does the term “Plan Administrator” mean?
The Plan Administrator administers the retirement benefit plan. Generally, both the Employer and a third party financial institution, such as Utah Retirement Systems, TIAA-CREF, Deseret Mutual Benefit Association (DMBA), Fidelity, Vanguard, or Hewitt, work together to administer the retirement benefit plan. The Plan Administrator is useful during the QDRO process because account statements and benefit estimates can be obtained from the Plan Administrator, the Plan Administrator will answer questions posed by the Participant regarding the benefits, the Plan Administrator will review a draft QDRO to determine whether it is “qualified,” and the Plan Administrator will process the final QDRO after it is filed with the court.
7. Is a DRO necessary to divide an IRA?
Many attorneys recommend that a DRO be used to divide an IRA because the DRO will clearly state the amount of the assignment, rights of the parties, and the tax consequences, as well as the DRO will be filed with the court so that a more complete record is maintained. Technically, some IRA financial institutions do not require a DRO to assign the IRA benefits from the account holder to the ex-spouse and only a letter of instruction is required; therefore, the account holder can contact their IRA financial institution and ask this question.
8. What formula is used to divide retirement benefits?
Generally retirement benefits are divided using either the “time rule” formula (typically for defined benefit pension plans) or by adding the contributions earned as a result of employment during marriage and investment earnings or losses on these contributions (typically for defined contribution plans, such as a 401(k) plan or profit sharing plan). The exact formula depends on the type of retirement plan in your case and your QDRO attorney can explain how the formula applies to your benefits.