Whether you are preparing for divorce or have finalized your divorce, you may hear and read the term “QDRO.” QDRO is an acronym that stands for “Qualified Domestic Relations Order.”
A “QDRO” is the step for which divorcing couples are often least prepared. You have finalized your divorce and are relieved to be done. Then you wonder how to split the retirement plan your former spouse has with their current (or past) employer. This is when you need a QDRO, a legal document that provides employers with specific instructions for dividing retirement plans, usually drafted by an attorney with this specialty. Whether you are mediating, using a collaborative divorce process or litigating, if you have pensions or retirement accounts that need dividing, you will likely need a QDRO.
First, let's take a step back.
There are two basic types of retirement plans: (1) a “Defined Benefit Plan,” the traditional pension that pays a monthly payment after retirement; or (2) a “Defined Contribution Plan,” a retirement savings account to which you and/or your employer contribute. Defined Contribution Plans can include employer-sponsored plans such as a 401k plans, 403b plans, profit sharing plans, employee stock ownership plans, or an “Individual Retirement Account,” (IRA) with no employer “attached.” An IRA may also contain assets that were “rolled over” into it from a previous employer-sponsored plan, when the employee/spouse left employment with that previous employer. Both defined benefit and defined contribution plans need a QDRO in order to be divided.
Retirement plan benefits are legally protected from being seized by creditors. One exception to this general rule occurs when a marriage ends, and a spouse is found to be entitled to some retirement plan benefits earned during the marriage and considered joint, marital (or “community”) property.
Employers who sponsor plans can be held liable if they improperly transfer assets out of a retirement plan. This is a huge liability for employers. Therefore, a legal document that meets very specific legal requirements, a QDRO, must first be drafted to clearly spell out precisely what the employer must do, and be signed by you and your spouse. QDRO preparers generally charge $800-$2,500 dollars, but not all preparers are equally skilled. Your divorce attorney(s) will refer you to someone they trust and respect. Ideally, divorce agreements spell out how spouses agree to pay for QDRO preparation. Most often, the cost is split between spouses.
Tip: Ask your attorney(s) to draft or have the QDRO drafted by another expert, alongside your divorce agreement, so you and your former spouse pay and sign the QDRO at the same time as the divorce agreement. This eliminates later surprises, any headaches obtaining agreement from the other spouse, and any disputes over payment for the drafting of a needed QDRO.
After signing your QDRO, the employer (whether current or former) can divide the retirement plans according to the QDRO’s specific instructions. Sometimes it’s helpful to call the employer’s HR representative first, to ensure your QDRO captures everything in the account that needs to be divided. When done correctly, this division and transfer of retirement funds is not a taxable event for either spouse. A well-versed legal expert will competently navigate this.
Questions? Feel free to contact Kimberly Malesky, CFP, CDFA with any questions or concerns at: (805) 770-5235 or email@example.com. Rather than paying 2 forensic CPA’s and 2 attorneys to analyze your legally required financial documents, you may prefer to work with a single, neutral, divorce financial specialist. A single, neutral financial specialist can provide the same functions at lower rates (including preparing both spouses’ Declarations of Disclosure), and shares this information with both spouses’ litigating, mediating, or collaborative divorce attorney(s). Financial transparency is legally required and failures can be addressed even by a financial neutral. Kimberly can also help you both create budgets to anticipate various agreement scenarios so you’re prepared before any negotiations with attorneys.
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