QDRO – Qualified Domestic Relations Orders
A Qualified Domestic Relations Order (QDRO) is a court-approved decree that assigns part or all of tax qualified retirement benefits to divided marital assets, to provide child support, or to pay spousal alimony. Any assignments of retirement interests must comply with two federal laws: the Internal Code of 1986 and the Employee Retirement Income Security Act (ERISA) of 1974. On order for a QDRO to be recognized, it must be made pursuant to state domestic relations laws and relate to the provision of marital property rights, alimony or child support for the benefit of a former spouse, child other dependent. Specifically, a QDRO must contain the name and address of the participant and each alternate payee, the name of each plan, the method of setting the amount to be paid, and the number of payments or length of time that the order applies. It’s important to note that an order issued during probate after the death of a participant is not a QDRO. This is because the proceeding does not relate to legal separation, divorce, or family support duties.
Divorce Settlement Agreements and QDRO
It’s critical that a divorce settlement agreement spells out the division of assets and transfer of funds. If the divorce settlement agreement states that you and your spouse will divide a retirement plan, the court must order a QDRO. It outlines how the plan administrator will pay the spouse’s share of the plan benefits. It, also, allows the monies in a pension account to be separated and withdrawn without penalties.
It’s always wise to complete and present the QDRO long before a divorce is finalized. Many retirement plans will not pay a lump sum amount and just pay on a monthly basis at retirement age. Once the divorce is finalized, you cannot go back to court and request other property of an equivalent value of that needed lump sum payment. But if the QDRO was completed and presented to the pension play before the divorce was finalized, you would’ve had the opportunity to negotiate a divorce settlement with more monies.
Another recipe for disaster would be if the spouse dies between the time the divorce was finalized and pension plan approval of the QDRO. After the divorce, you’d be considered single and pension payments would be determined on a single life basis. This means that any payment obligations of the retirement fund are null and void. Again, this scenario could’ve been avoided if the QDRO was completed and presented long before the divorce was finalized.
Who Prepares the QDRO?
The pension plan does not prepare the QDRO. Typically, the lawyer for the alternate payee prepares it. The QDRO is then reviewed by the participant’s lawyer to ensure that it carries out the court order. The plan administrator also reviews the proposed QDRO. Once both attorneys and the plan administrator approve it, the court will sign it. It’s not uncommon for changes to be made for compliance of the plan’s terms. After everything is done, the alternate payee is informed as to how and when benefits will be given. Many pension plan benefits are tax deferred, and taxes are paid as monthly payments are received. Some plans offer options to roll over the benefits into an IRA and are tax deferred until retirement age.
QDROs are not neutral decrees. Each party should have their own attorney to prepare or review the document. This way each party has a legal professional who will look after their best interests. At the same time, it is important to choose an attorney who has extensive experience working with pension plans. An attorney should have a deep understanding of pension plan laws, regulations and be highly qualified. Mistakes and omission can be financially detrimental to the wife, husband or both. Parties should avoid using a sample QDRO provided by the retirement plan. While it’s a guide, it often does not address key issues, and parties aren’t able to draft terms to their advantage. If you or your spouse have a pension plan, it’s best to seek advice from an attorney who can prepare a QDRO that meets the plan requirements and contains favorable terms that meet your interests.