Regular readers of Graceful Exits will recall April's post about retirement accounts in divorce, which mentions the use of a Qualified Domestic Relations Order (QDRO) to divide certain assets. If you are getting divorced, it's possible that you'll need to use a QDRO (pronounced "quah-droh"). But what is a QDRO, when do you need one, how do you get one, and how do they work? This month I explore the whats, whys, and hows of QDROs.
What is a QDRO?
A QDRO is a legal document that is separate and apart from your Divorce Decree and often written by an attorney. It is one type of domestic relations order. A domestic relations order is any judgment, decree, or order that relates to the provision of marital property to a former spouse and is made pursuant to state domestic relations law. Specifically, a Qualified Domestic Relations Order is a domestic relations order that creates (or recognizes) the existence of an alternate payee's right to receive all or a portion of an employee's retirement benefits under a qualified plan.[1] In other words, it lays out your rights to your ex-spouse's employer-sponsored retirement plan after divorce.
The key thing to know here is that a QDRO is a legal document that must be drafted in addition to your Divorce Decree to claim certain assets awarded to you in your divorce.
When do I need a QDRO?
Not every divorce case will need a QDRO. In fact, because they add costs and can be time consuming to implement, I try to limit dividing assets that require a QDRO where practical and where it serves the client's interests. Sometimes, though, QDROs are unavoidable.
QDROs are used to divide certain assets including 401(k) accounts, pension benefits, annuities, and any plans covered by ERISA. If you are dividing these types of assets, you'll need to have a QDRO for each account or benefit being divided. For example, if you are dividing two old 401(k)s and a pension, that's three QDROs that must be drafted and implemented.
Who will draft my QDRO?
In many cases, your attorney will draft any needed QDROs. Sometimes, if your ex-spouse works for a large employer, that employer will have pre-approved QDRO language that your attorney can use.[2] In some cases, you may wish to employ a QDRO Specialist. A QDRO Specialist is exactly what they sound like: a professional who only writes QDROs. This person may or may not be an attorney. Often, they are former attorneys or retirement plan administrators who have specialized training in this tricky intersection of family law and tax law.
In a case where you anticipate needing to tap assets divisible by QDRO to meet an immediate post-divorce need (and you're under age 59 ½), using a QDRO Specialist is a good idea. Why? Because your QDRO must specifically allow for the use of Section 72(t)(2)(C) of the Internal Revenue Code, which allows an alternate payee (that's you) to take money out of the plan being divided without the normal 10% early withdrawal penalty. If you don't write this language into your QDRO and you take money out, you'll likely get stuck paying a 10% penalty in addition to income taxes.
What happens after my QDRO is drafted?
Once your QDRO is drafted, it is best to have the retirement plan administrator review and approve the draft. This could take several weeks.
After your QDRO is approved by the plan administrator, it needs to be signed by the parties (that's you and your ex-spouse) and then filed with the court. The judge will need to review and sign the proposed QDRO. It is best to submit the QDRO at the same time as the Final Decree of Divorce; however, the judge can sign it later if necessary. Once signed by the judge, a certified copy of the QDRO must be sent back to the plan administrator for final processing.
Even if things run smoothly, this process can take weeks.
If things don't run smoothly, it can take months. This is a key reason I try to limit dividing assets that require a QDRO where practical and where it serves the client's interests.
What happens next?
Assuming all went smoothly and the plan administrator has approved and processed your QDRO, the next step is for the plan administrator to create an "alternate payee account" within the plan. Once that account is created, the assets awarded to you in your divorce decree (as outlined the QDRO) will be placed in the account. Congratulations! The assets are now titled in your name and under your control - your QDRO journey is finished.
What should I do with the account?
At this point, you have several options that I've covered in detail in the April edition of Graceful Exits: Retirement Accounts in Divorce. In most cases, you can leave the assets where they are, roll them over to another eligible retirement account, or cash out the account. Each option has pros and cons, and you should consider your choices carefully before proceeding. Having an expert like a Certified Divorce Financial Analyst™ (CDFA®) on your team can be very helpful in making an informed decision.
Many clients think that once their Divorce Decree is written and they've gotten the judge's signature, the work is over. But that's often not the case - there can be weeks or months of follow up as you move through the many post-divorce administrative tasks that await you. To help with this process, I've formulated a handy post-divorce checklist.
Are you navigating the post-divorce process alone?
Call me directly at 713-973-3814 or email me at scuddy@rwbaird.com to find out how I can help.
Thank you to Candace Demary of Demary Law for her assistance in fact checking this article.
Baird and Demary Law are not affiliated.
[1] A Qualified Plan refers to most types of employer-sponsored retirement plans (e.g., 401(k), pension, etc.)
[2] This can save you a buck or two in billable hours since your attorney doesn't need to write the order from scratch.