Monday, December 5, 2011

What Is a QDRO?

A QDRO or qualified domestic relation order is a domestic relations order that creates or recognizes the existence of an 'alternate payee's' right to receive, or assigns to an alternate payee the right to receive, all or a portion of the benefits payable with respect to a participant under a retirement plan, and that includes certain information and meets certain other requirements. It is a judgment, decree or order that is made pursuant to the state domestic relations law and that relates to the provision of child support, alimony payments, or marital property rights for the benefit of a spouse, former spouse, child, or other dependent of a participant.
A state authority, generally a court, must actually issue a judgment, order, or decree of otherwise formally approve a property settlement agreement before it can be a 'domestic relations order' under ERISA. The mere fact that a property settlement is agreed and signed by the parties will not, in and of itself, cause the agreement to be a domestic relations order.
There is no requirement that both parties to a marital proceeding sign or otherwise endorse or approve an order. It is also not necessary that the retirement plan be brought into state court or made a party to a domestic relations proceeding for an order issued that proceeding to be a 'domestic relations order' or a 'qualified domestic relations order'. Indeed, because state law is generally preempted to the extent that it relates to retirement plans, the Department takes the position that retirement plans cannot be joined as a party in a domestic relations proceeding pursuant to state law. Moreover, retirement plans are neither permitted nor required to follow the terms of the domestic relations order purporting to assign retirement benefits unless they are QDROS's.
What you just read is the complete definition according to ERISA (Employee Retirement Income Security Act of 1974) and the Department of Labor. So what does it mean? It means that in order to 'split' any part of one spouse's pension or retirement plan held at their current or past employer with the divorcing spouse. This crucial legal document is necessary to complete the final step in dividing retirement assets in divorce.
Here are some common misconceptions from clients:
  • A QDRO is not necessary to divide an IRA; the final divorce decree will suffice with investment companies and banks. Caution to investments held in annuities and investments with surrender charges. Call the company to find out what, if any surrender charges there will be before signing the final decree.

  • The misconception that the divorce decree is accurate on how retirement assets should be divided; to ensure an 'accurate' divorce decree, have your attorney share the language used in the decree to divide the retirement assets with the attorney drafting the QDRO before the final hearing. This language must be approved by the employer before the judge signs the final order.

  • My divorce decree is all I need to get my portion of retirement assets; we recommend having the QDRO ready and approved by the employer's benefits department when finalizing the divorce. This way the judge can sign both the final decree and the QDRO at the final hearing. Otherwise it may take 6 months to 2 years or longer before you can have these assets placed in your name.

  • The spouse receiving his/her portion of retirement assets will have to pay taxes on their portion. There are options to receiving your portion of retirement assets without paying full taxes. Call us, we can show you your options.

  • My spouse has a 401(k) and a pension to divide, all I need is one QDRO; This is wrong, each plan will require a separate QDRO. Please ask your attorney what your QDRO will cost and who will pay for it and put it in the final order. They may cost from $650 to $1,200 each!

  • The pension is split and QDRO is complete, now I can get my portion of the pension; this is not always the case, you must know what your options are before agreeing to split the pension. It depends on what the plan administrator outlines about your options. Some may require the alternate payee to turn a certain age before having access to income or a lump sum option. So if you are expecting income now, you may have to wait until you and/or your spouse turn 65.

  • My attorney can draft the QDRO as part of their retainer; most attorneys do not draft QDRO's as part of the divorce, they outsource the job to another qualified attorney. The attorney drafting the QDRO must obtain a sample or model QDRO from the plan administrator to properly prepare the document. Most companies will supply this model or sample to the QDRO attorney

  • What happens to my money once the retirement plan or pension is in my name? You have several options depending on the plans rules. If it is a 401(k), then your portion can be rolled into an IRA without paying taxes or penalties. If you are under 59 ½ and decide to take money from your plan you will be subject to not only income taxes, but a 10% early withdrawal penalty too!
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