A QDRO (pronounced ‘Quad-ro’ for those in the know) is a court order which is used to divide a retirement plan. A QDRO instructs the Plan to make direct payments to the non-employee spouse based on what was ordered by the court or agreed upon by the parties. A QDRO can divide marital or community property, award child or spousal support, alimony, or life insurance.
There is no getting around a QDRO if here is a retirement account that needs to be divided in a divorce. A Divorce Decree is not sufficient to divide a retirement plan. When you get a divorce, the only way to get money paid from one spouse’s retirement account to the other spouse is with a QDRO.
The actual order may be a Qualified Domestic Relations Order for a private plan or Domestic Relations Order (DRO) for a public plan (state, federal and military employees). But most people just call all retirement division court orders QDROs. There are two types of retirement plans – a defined benefit plan and a defined contribution plan.
Offered by both public and private employers, this type of retirement plan is either (1) a traditional pension or retirement plan that will pay monthly over time once you start taking your benefits or (2) a cash balance plan that provides a lump sum payment with the option to take monthly payments over time.
Offered by both public and private employers, a Defined Contribution Plan deposits pretax money directly into an account for each employee. Contributions may be made by the employee, the employer, or a combination of both.
The retirement plan could be any of the following: a 401(k) plan, profit-sharing plan, savings plan, money purchase pension plans, employee stock ownership plans, 401(a) plans, 457(b) plans, 403(b) plans, tax-sheltered annuities, thrift plans or deferred compensation plans.
ERISA is an acronym for the Employee Retirement Income Security Act of 1974. All qualified retirement plans are governed by ERISA. This federal law has a subsection that specifically allows for direct payment of a retirement benefit to a former spouse for marital or community property or for payment of support for a child or dependent.
A “joinder” is a California-only procedure in which the retirement plan is made a party to the divorce by filing “joinder pleadings,” which formally put a retirement plan on notice that there may be a marital property claim against those benefits.
You must “join” the retirement plan in a dissolution action before the domestic relations order will be processed for all California public plans and some private plans if required in their plan rules. Most private plans governed by ERISA do not require the service of joinder pleadings.
A Notice of Adverse Interest provides notice to a plan of a divorce or pending divorce. In many cases, service of this notice will trigger a hold on the plan benefits until a QDRO is served on the plan.
Mid to large private and public employers likely have both a defined benefit plan and a defined contribution plan for their employees. Very often the parties unknowingly only divide one of the two plans in a divorce. For example, the divorce judgment will award the marital or community property interest in one party’s 401k. But that party also has a traditional pension which will be paid monthly for a lifetime but at a later time. That is the million dollar asset and it is often missed!
When a plan participant dies before the non-participant spouse or former spouse, there may be a lifetime benefit that will continue to be paid to that non-participant. Whether there is a survivor benefit payable depends on the retirement account and the QDRO. All QDROs must award survivor benefits in a way the plan wants to ensure payment!
Generally used by estate planners, it is possible to access ERISA-based retirement accounts without penalties or excise taxes. You can use a marriage QDRO to diversify investments, for tax planning and estate/Medicaid planning.
Don’t wait to complete a QDRO! You may think you can wait until the end of your divorce or until retirement age, but doing so can cost you to lose some valuable benefits you are entitled to receive.
Going through a divorce is one of the most challenging periods of life. The legal and financial issues that arise in retirement division are critical in most divorces, but very often the division of retirement accounts are left until the end of a divorce with no clear explanation that an additional Court Order (QDRO) is required to be paid out. Unfortunately for many, a delay in getting a QDRO turns into a loss of what can potentially be a very large asset.
There is so much disparity in terms of access to QDROs and education concerning pension division in divorce. In most cases, retirement benefits (from 401ks to pension plans) are the largest assets in divorce. Laws have been created to protect retirement division in divorce but very few people know how to divide the benefits. The reality is that the vast majority of retirement benefits that should be divided are never actually divided. This hurts the parties and the entire judicial system. Through the use of technology QDROCounsel is making the difference in bringing access to justice drafting QDROs.
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