Do You Really Need a QDRO?
You’re in that final stretch of your divorce, you can see the finish line ahead. You’ve reached a settlement agreement with your spouse, just then, your attorney or mediator turns to you and says, “Now you need a QDRO and that’s going to cost more.” “What? Are you kidding? What the heck is a QDRO?”
The QDRO is that last hurdle in your race. Get used to the idea because most divorces will ultimately involve a QDRO. QDRO is an acronym for a legal document called a Qualified Domestic Relations Order and is required whenever a divorcing couple wants to divide a Qualified Retirement Account. What makes it a “Qualified” account? Qualified refers to being qualified for certain tax treatment under U.S. tax code.
A Qualified Plan is typically held by an employer and includes 401(k) plans, 403(b) plans, pensions, 457 plans, deferred compensation plans, and some RSU, restricted stock unit accounts.
To assign all or a portion of a Qualified Retirement Account to a non-employee spouse, the divorce decree must state that an amount is being transferred and then the second document, a QDRO, must be completed and submitted to the plan for the division to take place. The amount transferred can be a dollar amount or a percentage of the account. Make sure you know what the number is supposed to be, dollar or percent, and make sure it is stated properly in the QDRO.
IRAs or, Individual Retirement Accounts do not require a QDRO. But to take advantage of a little-known opportunity in divorce to avoid withdrawal penalties, even the IRA must use a QDRO. Legally, your divorce decree is all you need for an IRA division.
If you are granted retirement assets from a former spouse via QDRO, this is the point where you have ONE opportunity to take money out of that plan with zero penalties. It will be taxable income, but there will be no 10% penalty for the withdrawal before age 59 ½. If you want to be able to do this from an IRA, then you must use a QDRO.
In my practice, I facilitate the preparation of QDROs for my clients. Through this practice I have become aware of the many of pitfalls that QDROs present. Here is just a short list of some of the subtleties often overlooked.
- Is the non-employee spouse eligible to receive a lump sum settlement upon retirement?
- If the employee spouse dies, will the non-employee spouse still receive benefits?
- Were any outstanding loan balances taken into consideration?
- If splitting a 401(k), what is the actual date of division? Will the earnings after that date be included?
- For Pensions, does the plan set up a separate account for the non-employee spouse so they can choose their own payout options and beneficiaries? If not, have you protected the non-employee spouse from early-retirement penalties?
As you can see, the waters of a QDRO are fraught with peril and not for the inexperienced! Also, buyer beware! Prices for QDROs can range from $500 to $3,000. For the exact same document. Call me for suggestions on preparers.
Each plan has very specific requirements for the language of their QDROs and it is essential that the preparer have the plan documents in advance to ensure it will meet the requirements. You want to ensure that the QDRO will be PRE-APPROVED by the plan, if allowed. This will prevent rejection and more cost to re-do it correctly.
Once your decree is final and signed by the Judge, then you submit the finished QDRO to the Judge as well. Once it is signed, then and only then is it ready to submit to the plan. At that point, they will contact the non-employee spouse to get instructions for the disbursement or to identify the new account set up on their behalf.
This QDRO stuff can be complicated. Be sure you have an expert that can guide you through it and make sure you don’t make any mistakes.
About the author:
Bev Banfield is a CPA, Certified Divorce Financial Analyst®, and founder of Banfield Divorce Financial Advisors. The Denver-based company was established to help divorcing couples more easily and equitably separate their finances. Banfield has more than 30 years of experience in financial analysis, budgeting, and auditing. Contact us for more information at (303) 482-1726 or firstname.lastname@example.org. Connect with Bev on LinkedIn https://www.linkedin.com/in/bbanfield/