Many times… that’s a definite YES! Let’s say you find yourself in the final stretch of your divorce and you can see hope at the end of the tunnel. Perhaps you’ve reached a proposed settlement agreement with your spouse, then your Attorney or Mediator brings up, “In order to split this retirement account, you need a QDRO done and there will be a cost for that.” You may want to just scream out, “Wait, what? Are you kidding? What the heck is a QDRO?”
Well, a QDRO is the most critical document when it comes to receiving the money, so get used to the idea. Most divorces will involve preparing one.
QDRO is an acronym for a required legal document called a “Qualified Domestic Relations Order.” It’s needed whenever a divorcing couple agrees to divide a Qualified Retirement Account and allows them to take advantage of a little-known opportunity in divorce, that is, to avoid early withdrawal penalties.
A Qualified Plan is typically one held by an employer and includes 401(k) plans, 403(b) plans, pensions, 457 plans, and deferred compensation plans. To assign all or a portion of a qualified retirement account balance to the “non-employee spouse” (also known as the Alternate Payee), first, of course, it must be an option offered by the plan, then specifically stated and described clearly in the language of the settlement agreement/divorce decree. A second document (QDRO) must be prepared and submitted to the Plan Administrator for the actual division of funds to take place.
If you are granted qualified plan retirement assets from a former spouse via QDRO, this is the point where you have an opportunity to take money out of that plan with zero withdrawal penalties. Funds paid directly to you will be reported as taxable income, but there will be no 10% penalty if withdrawn before you reach age 59½. If you wait to withdraw money after the funds have been transferred to an IRA and you are under 59½, the 10% penalty will apply.
Division of IRAs (Individual Retirement Accounts) generally do not require a QDRO. Most often the IRA custodian will simply need your marital settlement agreement, and final judgment/divorce decree, but they may require their own internal transfer paperwork be completed, as well.
In my practice, I highly recommend that plan consultation and thorough plan research be initiated as early as possible in a case. My firm provides that service and will prepare most QDROs (or like orders).
Through this process, I have become aware of pitfalls that QDROs present and often may not be discovered in advance of preparing a proposed settlement agreement. Here is just a brief list of some of the subtleties often overlooked:
- Is the non-employee spouse eligible to receive a lump sum settlement upon retirement?
- If the employee (Participant) spouse dies, will the non-employee spouse still receive their benefits?
- Were any outstanding loan balances taken into consideration?
- If splitting a 401(k), what is the actual date of division? Will any earnings, gains, or losses after that date be considered?
- For pensions, does the plan offer an option to set up a separate account for the non-employee spouse so they can choose their own payout options and beneficiaries?
As you can see, the waters surrounding a QDRO are fraught with peril and this area is not to be taken lightly, nor should plan research be delayed. Get educated and start early in your divorce process by “investing” in our QDRO consulting services. Each plan has specific requirements for the language of their QDROs and it is essential that the preparer have the plan documents in advance to ensure it will meet the requirements. You want to make sure that if allowed the QDRO is submitted for pre-approval by the Plan Administrator, to prevent rejection and more cost to re-do a signed and completed QDRO.
Once your decree/final judgment is finalized and signed by the Judge, then the pre-approved QDRO can also be submitted for the Judge’s signature. After they sign, then and only then is it ready to submit back to the Plan Administrator.
After the QDRO is “fully qualified” by the Plan Administrator, the non-employee spouse (Alternate Payee) should receive instructions on options available for the fund’s disbursement, or to direct that a new account be set up on their behalf.
This QDRO stuff is complicated. Be sure you have an expert that can guide you through it. Make sure you do not get taken advantage of by anyone. If you need early plan research done so you can understand all your options, or if you are looking for affordable and thorough QDRO preparation services, contact Sand Oak Divorce Solutions today. We are on your side.
