What Does a QDRO (A Qualified Domestic Relations Order) Do?
A QDRO is a binding legal order that is signed by a Georgia superior court judge. The QDRO divides a private retirement plan – a pension plan, an IRA, a 401(k) – with an “alternate” payee, the ex-spouse. So remember, it's a legal document that must be properly drafted and signed by a judge to be effective.
The Participant and the Alternate Payee
The partner who earned the retirement benefit over years of work is the “participant,” and the ex-spouse who receives part of that benefit after a divorce is called, under the law, the “alternate payee.” A QDRO is used to award benefits to the alternate payee as well as survivor benefits if the “participant” should die.
What Plans Utilize a QDRO?
You will need a QDRO to divide the following types of plans:
- 401(k), 403(b), and 457 plans
- employee stock ownership plans
- money purchase plans
- deferred compensation plans
- tax-sheltered annuities
- profit-sharing plans
- thrift plans
- business/corporate defined benefit or pension plans.
A QDRO Is Not Automatically Granted
But a qualified domestic relations order is not automatically granted or provided in a Georgia divorce, even if your ex-spouse has a considerable amount of money in a retirement fund and you think you should receive at least part of it. In Georgia, a lawyer must file a petition with the court for a QDRO as a part of the property settlement.
What Retirement Plans Does a QDRO Cover?
A retirement plan targeted subject to a qualified domestic relations order must be a plan that is covered by the Employee Retirement Income Security Act (ERISA) of 1974, a federal law.
What About Government and Military Retirement Plans?
More difficult to divide than a private retirement plan, after a divorce military and most government pension plans are not generally covered by QDROs.
QDRO Requirements Under ERISA
The ERISA requirements making a domestic relations order qualified are pretty straightforward. Under the federal ERISA statute, QDROs must contain the following:
- The full name and last known mailing address of the participant and the alternate payee,
- The specific name of each plan to which the order applies,
- The precise dollar amount or exact percentage (or the method of determining the amount of percentage) of the benefit to be paid to the alternate payee, and
- The number of payments or time period to which the order applies.
The QDRO Must Not Include Certain Provisions
- If a benefit it isn't otherwise provided under the plan, a QDRO can't provide it;
- A QDRO can't increase someone's benefits;
- You can't take the benefits of another alternate payee from a previous QDRO.
When Should the QDRO Be Drafted?
It is optimal to have the qualified domestic relations order prepared and executed when the divorce becomes final. If, for example, an unfortunate event results in the death of the spouse whose retirement benefits are being divided prior to the QDRO being drafted, the spouse who was to benefit may lose the portion of the pension to which he or she is entitled.
Why Is a QDRO So Complicated?
A QDRO has many elements that need to be correctly addressed. There is a plan description, plan documents, individual benefit and account statements, and any model QDROs developed for use by the plan.
The QDRO administrator should be contacted to see the specific and detailed requirements of that particular plan. There may be a preliminary review prior to execution.
Each plan has its own set of benefit provisions and administrative rules, and they can be complex and arcane. While some plans divide earnings by percentage, still others divide by shares. And while some permit a distribution of the ex-spouse's portion at the time of the divorce, others require recipients to wait until retirement.
Generally, to taxes or penalties are incurred at the time of transfer under a QDRO. However, the alternate payee pays ordinary income tax after withdrawal of any funds. If the retirement plan consisted partially or entirely of after-tax contributions, the original basis is allocated pro-rata between the participant and the alternate payee.
May a QDRO Be Part of the Divorce Decree or Property Settlement?
Pursuant to ERISA § 206(d)(3)(B); Internal Revenue Code § 414(p)(1), there is nothing in ERISA or the Code that requires that a QDRO be issued as a separate judgment, decree, or order. So there is legal flexibility in the QDRO formulation. Thus, a QDRO may be included as part of a divorce decree or court-approved property settlement, or just issued as a separate order, without affecting its “qualified” status. But the order must satisfy the specific and precise legal requirements to be a QDRO.
Yes, the Wording of the Settlement Agreement Matters!
The wording of the settlement agreement matters when doing a QDRO. It is important that the proper provision and formulas are utilized. For example, the difference between "50% as of divorce" versus using the coverture formula (50% of the produce of multiplying the benefit at retirement by a formula, the numerator of which is time participating in the plan during the marriage and the denominator of which is the total time participating in the plan) could mean hundreds of dollars different per month. Make sure you're the wording contains the appropriate language to protect your interests.
QDRO Tax Advantages – An Example
It should be noted that a QDRO has practical tax advantages to the employee-spouse and can be a good way of transferring funds to a former spouse.
Here's an easy example to follow: Husband has a 401(k) plan with a $200,000 balance.
If Husband takes a $100,000 distribution to pay to Wife pursuant to their divorce agreement, Husband will incur a 10% early withdrawal penalty, and Husband must also pay income taxes on the distribution.
Let's assume an effective tax rate of 20%, and Husband would incur $30,000 in taxes and penalties on the $100,000 payment to Wife.
Alternatively, if Husband transfers $100,000 to Wife via a QDRO from his 401(k) plan, there are no tax consequences to Husband.
Do I Need a QDRO for an IRA?
A QDRO is not needed of a personally managed IRA as it is not a “Qualified Plan” as defined by the Employee Retirement Income Security Act of 1974, i.e., ERISA.
An Individual Retirement Accounts (IRA) or annuity established under Section 408 or 408A of the Internal Revenue Code of 1986, as amended, are not qualified pension plans that have third party administrators and may be assigned and transferred to another party pursuant to Section 408(d)(6) of the Internal Revenue Code without the requirement of a Qualified Domestic Relations Order (QDRO).
Must a Domestic Relations Order Be Issued by a State Court?
Pursuant to ERISA § 206(d)(3)(B)(ii); Internal Revenue Code § 414(p)(1)(B); U.S. Department of Labor, Employee Security Administration Advisory Opinion 2001-06A, a domestic relations order may be issued by any state agency or instrumentality with the authority to issue judgments, decrees, or orders, or to approve property settlement agreements.
When Does the Alternate Payee Begin to Receive Payments?
The alternate payee will begin to receive payments when payments to the member begin. Payments cannot begin earlier, except in the case of a QDRO that stipulates that the alternate payee can collect in the event of a member's death prior to retirement.
What Happens if I You Don’t Get a QDRO for Retirement Accounts?
If you fail to get a properly drafted QDRO, here are some major problems that are possible:
- A former will not get certain retirement benefits, such as spouse survivor benefits from a pension plan; or
- A former spouse will have simply ignored retirement benefits altogether, likely leaving the spouse with a smaller percentage of the couple's total assets than they deserved; or
- Retirement benefits will be mishandled, possibly resulting in huge tax penalties.
How Can I Get a QDRO?
The terms and conditions of the QDRO must be set-forth in the settlement agreement or divorce decree. The order should set forth, at a minimum:
- The specific dollar amount or exact percentage of the benefit to be assigned from the individual participating in the plan
- When the benefits are to be divided
- The exact identity of the plan from which the benefits are to be allotted
- Whether any post-retirement subsidies are to be included
- Whether the alternate payee is to be named as surviving spouse for purposes of a joint and survivor's annuity, if applicable
What Companies Are the Largest 401(K) Providers?
Here are some of the largest 401(k) providers:
- Charles Schwab
- Fidelity Investments
- Voya Financial
- Bank of America
- T. Rowe Price
- Prudential Financial
- Empower Retirement
How Do I Know if I Really Need a QDRO?
If a pension plan, including a defined benefit plan or a defined contribution plan, is going to be part of your divorce settlement, then you need a QDRO. Defined benefit plans (traditional pensions with monthly payments or other specific benefits paid at retirement or other qualifying events) and defined contribution plans (individual retirement savings accounts, including 401(k) plans) by law need QDROs to allow them to distribute to parties other than the employees who earned the benefits.
What Is Done to Get a QDRO Completed?
Generally, he steps to get a QDRO in place and effective include:
- Researching the retirement plan and drafting the QDRO
- Submitting the proposed QDRO to the Plan Administrator for a pre-approval review of the QDRO (when offered by the plan) and making any revisions that may be required by the Retirement Plan Administrator to achieve full acceptance with the plan
- Availability to discuss the QDRO process and answer any questions
- Ensuring we receive the final, pre-approved QDRO to be signed and filed with the court and then served on the retirement plan
What About Military Pensions?
As in so many areas, the United States Military has its own procedures and protocols. The Defense Finance and Accounting Service (DFAS) administers the military retirement and provides for the division of military retirement benefits, known as “Retired Pay,” pursuant to the Uniformed Services Spouse's Protection Act (USFSPA).
DFAS has legal thresholds which need to be reached before disposable Retired Pay may be divided for a former spouse. These requirements include that the parties have been married for at least 10 years which overlaps with at least 10 years of military service, in order for DFAS to pay a former spouse directly as a property payment.
How Will the Benefits Be Paid Using a QDRO?
The alternate payee may have a right to elect the form in which benefits will be paid under the plan. There is no single “best” way to divide retirement benefits in a QDRO. Many factors go into determining the optimal arrangement, including the type of retirement plan, the nature of the participant's retirement benefits, and the reasons the parties want to divide those benefits.
What Happens to the Rights Created by a QDRO if a Plan Is Terminated?
The United States Department of Labor believes that the rights granted by a QDRO must be taken into account and upheld in the termination of a plan as if the terms of the QDRO were part of the plan.
If the QDRO grants the alternate payee part of the participant's benefits, the plan administrator, when terminating the plan, must provide the alternate payee with the notification, consent, payment, or other rights that it would have provided to the participant with respect to that portion of the participant's benefits.
Why Would a QDRO Be Rejected?
There are many reasons for a QDRO to be rejected. Probably the number-one reason QDROs are rejected is getting wrong the plan name. While the United States Department of Labor provides that a plan administrator is not required to reject an order if it fails to correctly specify factual information that is easily obtainable, the reality is plan administrators will fail an order for the slightest error in the plan name.
What’s the Timing for Getting Benefits?
You'll want find the earliest time that the alternate payee can begin receiving benefits. A shared-payment QDRO can (and should) set the date that payments to the alternate payee will begin. However, this date cannot precede the date the plan administrator receives the order for approval.
A separate-interest QDRO can, by law, designate a time for the alternate payee to receive the separate interest, or it can give the alternate payee the same timing options available to the participant.
The participant cannot begin receiving benefit payments before reaching his or her “earliest retirement age,” unless a plan specifically allows payments at an earlier date. Sec. 414(p)(4)(B) defines earliest retirement age as the earlier of (1) the date on which the participant qualifies for benefit payments under the plan's provisions; or (2) the later of the date the participant reaches age 50 or the earliest date the participant can begin receiving benefits if the participant no longer works for the employer. You should note that some retirement plans allow alternate payees to elect to receive a lump-sum payment of the separate interest at any time.
What Must a Plan Administrator Do So That Benefits Are Not Wrongly Paid Out?
There are strict rules and procedures in place to ensure the segregation of monies related to QDROs.
During the review process, a plan administrator must take action so that benefits are not wrongly paid out to the participant that should be paid to the alternate payee. Here are some of those rules:
- the plan administrators must separately account for the amounts that would be payable to the alternate payee and make sure these amounts are not paid to the participant
- a plan administrator's duty to separately account for and preserve the segregated account is limited in time, however, and requires that the plan administrator must preserve the segregated assets for no longer than 18 months, which period begins on the first date after the plan receives the QDRO that the order requires payment to the alternate payee
What Disclosure Rights Does an Alternate Payee Have Under a QDRO?
For purposes of ERISA, a person who is an alternate payee under a QDRO generally shall be considered a beneficiary under the plan. Thus, the alternate payee must be furnished, upon written request, copies of certain documents, including:
- the latest summary plan description
- the latest annual report
- any final annual report
- the bargaining agreement, trust agreement, contract, or other instrument under
- which the plan is established or operated
What Does the Term “Plan Administrator” Mean?
The Plan Administrator administers the retirement benefit plan. Generally, both the Employer and a third party financial institution, such as Fidelity or Vanguard, work together to administer the retirement benefit plan. The Plan Administrator is valuable during the QDRO process because:
- account statements and benefit estimates can be obtained from the Plan Administrator
- the Plan Administrator can answer questions posed by the Participant regarding the benefits
- the Plan Administrator will review a draft QDRO to determine whether it is “qualified,”
- and the Plan Administrator will process the final QDRO after it is filed with the court
Can All Retirement Plans Be Divided?
Not all retirement plans can be divided, including some municipal plans. A difficult post-divorce situation is where it is discovered, after the final judgment (in some cases, several years after the divorce), that one of the retirement assets parties have agreed to divide are simply not divisible or assignable.
Who Should Draft the QDRO? Should It Be in the Settlement Agreement?
You should specify the party who is responsible for drafting the QDRO. It's hard to believe, but some agreements fail to assign responsibility for drafting the QDRO. Many times QDROs are often the last items completed in a divorce. Frequently, we've seen, clients have discharged their respective attorneys and either do not know the QDRO hasn't been done or do not know that a QDRO needs to be done. Don't make this mistake!
What Are the Duties of a Plan Administrator Upon Receipt of a Domestic Relations Order by the Plan?
The plan administrator has specific duties under the law upon receipt of a domestic relations order. These duties include:
- promptly notifying the affected participant and each alternate
Payee Named in the Order
- to provide a copy of the plan's procedures for determining whether a domestic relations order is a QDRO
- to determine whether the order is a QDRO within a reasonable period of time after receipt of a domestic relations order, and
- to promptly notify the participant and each alternate payee of such determination
Remember to Address Even the “Ambiguous” Issues!
Many QDRO issues exist. Here are just some to be aware of:
- There's an outstanding loan against the retirement account.
- The participant is not yet (and maybe never will be) fully vested in the account balance (and who will who get the “benefit” of the post-marital years of service).
- The QDRO is not drafted specifically enough about the division of the asset(s)(e.g., the percentage of the account is listed without an “as of” date, language is used such as “equal division” rather than specific percentages, investment income and gains and losses allocated to a balance identified as of a date prior to the actual date of distribution).
- The account includes company stock, which may have option provisions to restrict non-employees (and terminated employees) from possessing shares.
- There are asset classes with major and meaningful surrender charges triggered at the time of liquidation.
How Much Can Be Given to an Alternate Payee Through a QDRO?
A QDRO can give an alternate payee any part or all of the retirement benefits payable with respect to a participant under a retirement plan.
However, the QDRO cannot require the plan to provide certain things, including:
- increased benefits (not provided for in the plan)
- to provide a type or form of benefit, or any option, not otherwise provided under the plan
- the payment of benefits to an alternate payee that are required to be paid to another alternate payee under another QDRO
What Does the IRS Require From a Plan Administrator?
The plan administrator must follow the exact rules and procedures promulgated by the Internal
Revenue Service (IRS) in a variety of areas. These rules include:
- the plan administrator is required to pay all benefits in accordance with any proper qualified domestic relations order
- the plan must have written procedures in place for determining if an order is, in fact, a qualified domestic relations order.
- the procedures should contain precise steps to be followed in determining if and how the benefit will be legally split
We Can Help You!
Attorneys Valerie Sherman and Bill Sherman have recognized expertise as QDRO lawyers in the division of retirement benefits incident to divorce. To speak with us about dividing assets with a Georgia QDRO, please contact us online or call us at (678) 712-8561.
It is important to hire experienced QDRO counsel to divide retirement accounts accurately!