What is a QDRO?
A Qualified Domestic Relations Order (QDRO) is a legal document that outlines how retirement benefits will be divided between divorcing spouses. It establishes the rights of an alternate payee (the non-employee spouse) to receive a portion of the retirement benefits earned by the employee spouse during the marriage.
Importance of QDROs in Divorce Proceedings
1. Division of Retirement Benefits: Retirement accounts, such as 401(k) plans, pensions, and other qualified plans, are often significant assets accumulated during a marriage. A QDRO ensures that these assets are divided between the spouses, in accordance with federal and state laws, as well as the parties’ agreement or judgment of divorce.
2. Compliance with ERISA: The Employee Retirement Income Security Act (ERISA) governs many retirement plans in the United States and sets forth rules regarding the division of retirement benefits in divorce. A QDRO must comply with ERISA guidelines to ensure that the division of benefits is legally enforceable. See also our blog post from February 5, 2024 titled Major Differences in ERISA Governed Plans and Non-ERISA Governed Plans.
3. Protection of Benefits: Without a QDRO, a retirement plan administrator will likely refuse to distribute benefits to anyone other than the employee spouse, even if a divorce decree mandates the division of assets. A QDRO provides the necessary authorization for the plan administrator to divide the benefits as specified.
4. Tax Considerations: Properly structured QDROs can help avoid tax implications for both parties. Specifically, the QDRO shifts the burden of the taxes on the distribution from the employee spouse to the alternate payee. The alternate payee can delay tax payments on the receipt of the funds through a rollover to an IRA. Alternatively, if the alternate payee receives the funds directly, they can avoid the early withdrawal penalty if younger than 59 ½ years of age.
5. Retirement Planning: QDROs play a crucial role in the long-term financial planning of both parties post-divorce. By ensuring a division of retirement benefits, spouses can better prepare for their financial futures and maintain financial stability in retirement.
How to Obtain a QDRO
Obtaining a QDRO generally involves the following steps:
- Drafting: The QDRO must be carefully drafted to comply with both state divorce laws, federal retirement plan regulations, and individual plan rules. It is advisable to seek the assistance of an attorney experienced in QDRO preparation. Most divorce attorneys do not prepare QDROs. If you have retained a divorce attorney to represent you, they may refer you to another attorney for your QDRO.
- Approval: Once drafted, the QDRO must be submitted to the court for approval as part of the divorce proceedings. The court will review the document to ensure that it meets all legal requirements.
- Implementation: After approval, the QDRO is submitted to the retirement plan administrator for implementation. If the administrator approves the QDRO, the administrator will then divide the retirement benefits according to the terms outlined in the QDRO. If the administrator rejects the QDRO, the administrator will notify the parties of the defects, which must be resolved and an amended QDRO must be prepared.
In divorce proceedings, the division of assets can be a complex and contentious process. A Qualified Domestic Relations Order (QDRO) is a vital tool that ensures the distribution of retirement benefits between divorcing spouses. By understanding the importance of QDROs and seeking appropriate legal guidance from an experienced attorney, divorcing couples can navigate this aspect of the divorce process with greater clarity and confidence, paving the way for a smoother transition into their post-divorce financial futures.
Markham Law Firm employs attorneys who prepare QDROs and work in the division of retirement benefits on a regular basis. If you are in need of a QDRO please call us at 240-396-4373.
