Retirement Accounts and Qualified Domestic Relations Orders – QDROs

Federal law requires a QDRO to divide certain retirement plans

Divorce after retirement

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Spouses normally split their assets when they divorce, but the division of certain retirement plans requires an extra step. In many cases, you'll need a qualified domestic relations order (QDRO) to deal with these assets.

QDROs are legal orders from divorce courts that are used to divvy up IRAs, private pension plans, and 401(k) plans. The spouse who earned the benefit or contributed to the plan is referred to as the "participant." The other spouse is the "alternate payee."

The targeted retirement plan must be one that's covered by the Employee Retirement Income Security Act (ERISA) of 1974. Federal law prohibits dividing these benefits without a QDRO.

Retirement Account Assets in Divorce

As a general rule, courts divide only the marital portion of these benefits—contributions made and growth associated with those contributions from the date of the marriage to the date of marital separation. Some states use the date of divorce.

Pensions can be tricky to calculate, however, particularly if the participant spouse hasn't retired yet. It can help considerably to have an attorney and a financial advisor on hand to assist you in valuing these assets to be split as part of a divorce

A spouse might propose trading another asset in settlement negotiations, such as a house or other investment, in lieu of a share in the retirement account. This would eliminate the need for a QDRO, and keep her retirement savings on track.

Courts sometimes let each spouse keep his or her own retirement plan when both have substantially similar plans and both have been contributing based on their earnings throughout the term of the marriage.

Getting the Required Information

As potential alternate payees, spouses have a legal right to information regarding the retirement plans of the other. Contact the plan administrator to ask for certain information, including the plan description, your spouse's benefit statements, and all associated documents.

You can also ask for a sample copy of the plan's preferred QDRO—they're not all identical, and having a format to follow can simply things later on.

Don't expect that the plan administrator will be overjoyed to hear from you, but assert your right to this information. You can mention the Department of Labor regulations. That should get someone's attention.

Go to the FreeERISA website if you don't have contact information for your spouse's plan. You can track down the plan's most recently filed Form 5500 here, and the form should tell you everything you need to know about who to reach out to and how.

What a QDRO Achieves

Federal law imposes a 10 percent penalty on early withdrawals from retirement plans prior to age 59 1/2, allowing for certain exceptions. One such exception is withdrawals made pursuant to a divorce.

You won't have to pay this early-withdrawal penalty on money transferred to your ex-spouse under a QDRO. A QDRO protects you from unfairly having to pay taxes and penalties on that retirement money on behalf of your spouse.

A QDRO can not only divert a portion of benefits to the alternate payee while the participant is alive, but it can also pay survivor benefits when the participant dies.

Preparing a Qualified Domestic Relations Order

If you're awarded a share of your former spouse's retirement account, either via settlement or by the judge, your attorney will most likely draft the QDRO so it can be forwarded to the divorce court for a judge's signature. The QDRO is then submitted directly to the retirement or pension plan administrator. The order is not technically "qualified" until it's accepted by the plan.

If You Don't Have a Lawyer

You potentially can use a web-based template to create a QDRO that you can submit to the court for approval and signature if you don't have a lawyer, but it's preferable to get an example form from the plan administrator. Lacking either of those options, it's a good idea to have an experienced attorney prepare the QDRO on your behalf.

The stakes can be pretty high and these orders can be complicated. Any small error can cost you, your spouse, or both of you a significant amount of money. It's sometimes possible to hire someone to simply prepare and submit a QDRO, even if she doesn't handle your entire divorce.

The Bottom Line

Make sure your lawyer knows about the retirement account asset as early in the process as possible. The danger of waiting too long is that you could be left with nothing if your spouse dies without having designated you like the alternate payee.

It's best to initiate QDRO paperwork in the early days of the divorce so the court can finalize the divorce and approve the QDRO virtually at the same time.