Spouses normally split their assets when they divorce, but the division of certain retirement savings accounts requires an extra step. In certain cases, you'll need to prepare and submit a qualified domestic relations order (QDRO) form in the aftermath of a marital split to deal with these assets.
- Qualified domestic relations orders (QDROs) are legal orders that divvy up assets in retirement plans after divorce.
- A QRDO covers defined benefit plans, such as pensions, and defined contribution plans, such as 401(k), 403(b), or employee stock ownership plans.
- In many states, courts will divide only the marital portion of retirement plans—that is, the contributions and growth that occurred during the marriage.
Basics of QDROs
QDROs are legal orders from a state authority such as a court that are used to divvy up assets in qualified retirement plans such as 401(k) or pension plans. The QDRO must abide by state domestic relations law and must relate to child support, alimony, or other marital property rights.
The spouse who contributed to the plan or earned the benefit is referred to as the "participant." The other spouse is the "alternate payee." However, an alternate payee can be a spouse, former spouse, child, or another dependent. Other individuals aren't entitled to retirement plan benefits under a QDRO.
When a QDRO Form Is Required
Your divorce proceedings may culminate in a domestic relations order (DRO) that lays out the division of retirement assets between the participant and the alternate payee. But for a retirement plan administrator to divide assets from a qualified retirement plan covered by the Employee Retirement Income Security Act of 1974 (ERISA), you need a stricter type of DRO known as a QDRO.
This is because ordinarily, under ERISA and the Internal Revenue Code, a retirement plan participant can't legally assign his stake in the plan to someone else. For this reason, most qualified retirement plans won't pay any benefits to an ex-spouse until he submits a QDRO with the plan administrator.
A QDRO is a DRO that meets the rules under the ERISA to let the plan administrator divvy up assets in a participant’s qualified retirement plan. ERISA covers both defined benefit plans, such as pension plans, and defined contribution plans, such as 401(k), 403(b), or employee stock ownership plans.
Individual retirement accounts (IRAs) are not covered by ERISA, so you don't need a QDRO to divide the assets in an IRA.
Likewise, your spouse might propose trading another asset in divorce settlement negotiations, such as a house or another investment, in lieu of a share in a retirement account. This would eliminate the need for a QDRO, and keep the participant's retirement savings on track.
Qualified retirement plan assets cannot be divided without a QDRO.
Division of Plan Assets Under a QDRO
A QDRO may require a participant to assign all or part of her retirement benefits to the alternate payee. Naturally, participants who face a QDRO feel uncertainty at the prospect of losing their savings. But in many states, courts will 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.
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 the assets to be split as part of a divorce.
A court may even 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.
Benefits of a QDRO
While it may seem as though the alternate payee in this arrangement has everything to gain, and the participant has everything to lose, a QDRO offers some notable protections for the participant:
- You can avoid the early withdrawal penalty. Federal law imposes a 10% penalty on early withdrawals from retirement plans prior to age 59.5 but makes an exception for withdrawals made pursuant to a QDRO. This means that you won't have to pay the early-withdrawal penalty on money transferred to your ex-spouse under a QDRO.
- Your spouse will pay taxes on distributions. Benefits distributed from a retirement plan under a QDRO to a child or other dependent are treated as income to and are therefore taxable to the participant. However, you won't be on the hook for paying taxes on that retirement money on behalf of your spouse because it will be included as income for your spouse.
- Your ex-spouse can receive benefits after your death. 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. This is useful if you want to secure the financial future of your ex-spouse.
Getting Information for a QDRO Form
As potential alternate payees, spouses have a legal right to obtain all the information needed about the retirement plans of the other spouse to prepare a QDRO. Contact the plan administrator to ask for certain information, including the plan description, your spouse's benefit statements, and all associated documents. In general, the plan administrator is the person designated as such in your spouse's retirement plan document.
You can also ask for a copy of the plan's "model" or template QDRO form—they're not all identical, and having a standard format to follow can simplify things later on.
If you don't have contact information for your spouse's plan, go to the FreeERISA website. You can track down the plan's most recently filed Form 5500. The employer or the plan administrator files this form with the IRS to report information about the retirement plan. The form should tell you everything you need to know about how to contact the administrator.
Preparing and Submitting a QDRO Form
If you're awarded a share of your former spouse's retirement account, either via a court judgment or a settlement, 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 plan administrator. The order is not technically "qualified" until it's accepted by the plan administrator.
If you don't have a lawyer, you can also use the model template given to you by the plan administrator to create a QDRO that you can submit to the court for approval and signature. Lacking either of those options, you can also fill out and print a web-based QDRO form from Fidelity or another reputable provider and submit it to the court, but it's preferable to use the QDRO form from the plan administrator.
The QDRO form needs to contain the following types of information:
- The name and mailing address of the participant and alternate payee
- The name of the retirement plan
- The dollar amount or percentage of the assets that the payee will receive
- The number of payments and the payment time period
While the form structure may sound simple, these orders can get complicated, and the stakes can be high. A small error can cost you, your spouse, or both of you a significant amount of money. Consider hiring an attorney experienced with QDROs to prepare and submit your QDRO, even if she doesn't handle your entire divorce.
The Bottom Line
If you think you are entitled to benefits of a spouse's retirement plan, ensure that your divorce attorney knows about the retirement account asset as early in the process as possible. You could be left with minimal assets to your name if a QDRO doesn't designate you as an alternate payee.
If a divorce decree entitles you to an ex-spouse's qualified retirement plan assets, you will need to prepare and submit a QDRO in the aftermath of your split in order for the retirement plan administrator to divvy up the plan assets. You can have an attorney draft the QDRO form, use a model QDRO from your plan administrator, or use a web-based QDRO form.
Whatever approach you take, initiate QDRO paperwork in the early stages of the divorce so that the court can finalize the divorce and approve the QDRO in a timely manner.