What is a QDRO?
A QDRO arises as a result of a divorce or a legal separation. It is an order in the United States to recognize that the non-employee, former spouse has an ownership interest in the employee spouse’s retirement plan. A QDRO may be used for spousal support or child support. QDROs apply to employee benefit or pension plans and are subject to ERISA (Employee Retirement Income Security Act) laws. ERISA is the American Federal law governing private sector pensions.
Domestic relations courts within your State must issue the QDRO. Once it is issued, the plan administrator will review the plan for compliance with the terms of the plan and with ERISA or other applicable laws. If you have already settled your divorce, then your QDRO will be a separate document. If you are in the midst of your divorce process, the QDRO can be part and parcel to your original divorce decree. Once the QDRO is recognized and approved by the plan administrator, she or he will award a portion of the plan participant’s benefits to an alternate payee. The alternate payee is typically the former, non-employee spouse but could also be an existing spouse, a child or other dependent.
Once the alternate payee is approved you need to be sensitive to whether or not you will be awarded benefits retroactively. In other words, depending on how things are written, the plan administrator may only award future benefits to the former, non-employee spouse, not past benefits. This assumes the retirement plan has already started to make distributions. If the retirement plan has not made any distributions then the issue may be moot. Most states will allow the QDRO to be entered to collect for past and future child support payments.
It is worthy to note, certain types of retirement plans are not covered by ERISA. Examples include:
- Military retirement plans
- State and municipal retirement plans
- Federal retirement plans
- Most deferred compensation plans
Key message is to be sensitive whether the plan is covered by ERISA. ERISA typically covers company pension plans. Otherwise the plan may be outside of the governance of ERISA and another set of guidance oversees how the matter needs to be handled.
The value of future payouts is always the big question
A sensitive issue in QDROs are how much the distributive awards are worth. A relevant factor to take into consideration is whether or not the employee participant was already enrolled in the retirement plan prior to the marriage. If the employee participant entered the retirement plan after the effective date of the marriage, each party’s share may be 50/50. The value of the distributions are typically based on the earliest date that you signed the divorce decree, legal separation agreement or another representative agreement.
If the participant engaged in the retirement plan before the marriage there are a number of factors to look at such as:
- When did the participant start to participate in the retirement?
- How much were the participant’s contributions into the plan before the marriage?
- Have any of the contributions already been taxed as taxable income?
- Were the contributions tracked over time?
- How close is the target date for required minimum distributions?
- How much did the retirement plan appreciate over time — both before the marriage and during the marriage?
- How much has the value of the retirement plan changed after the divorce?
- What rationale should you use to allocate between child support or spousal support?
- How long should the benefit payments to the alternate payee last?
- Is the alternate payee allowed to request distributions earlier than the plan date of distribution?
- Does the distribution have to match the amount the employee participant receives?
What is required of the order?
The court for a QDRO must comply with three general sets of rules:
- The requirements of the plan — In other words it is important to throughly read and interpret the retirement plan to ensure you will be in compliance before sending any information to the plan administrator.
- The constraints of ERISA — for the most part this parallels the US tax code
- The domestic relations law for the applicable state and its standards
All QDROs must contain certain information such as:
- The formal name of the plan
- The full name and last known mailing address of the participant, employee or contributor and alternate payee
- Social security numbers of both parties which are often provided under separate cover to preserve the privacy of each impacted party
- Participant’s plan identification number if it is different from the social security number
- The amount or portion of the plan benefit that will be payable to another party (alternative payee) and how the benefit is calculated
- The number of payments or period to which the order applies
- For a defined benefit plan, how long the benefit will be paid to the alternative payee
A QDRO cannot require a plan to:
- Provide an alternate payee or participant with any form of benefit or any option that the plan would not normally provide to the employee benefit participant
- Provide for higher benefits beyond the benefits determined from the plan
These issues among others are very sensitive to manage the financial outcomes of your divorce, even if your divorce has already been settled. If you simply use the date the employee participant entered the plan and the date of your marriage you will find yourself not receiving the appropriate amount of the distributions. Questions will arise later on which can bring you back to court to settle your differences.
About the Author
Larry Smith is a Founding Partner of Divorce Outcomes, a specialized professional services firm that manages all of the financial aspects in a divorce process. Since 2003 he has worked as a trusted financial advisor, financial advocate, divorce architect and technical financial expert; he is not an attorney. He is an alumni of KPMG and Andersen with expertise in technical accounting, forensics, sophisticated taxation, management consulting, risk management, advanced process engineering, business combinations, divorce management, multi-party negotiations, advanced quality analytics and cognitive performance technologies. Since 1986 Larry has been advising individuals and organizations about innovative financial solutions to resolve complex financial challenges that arise in life and in business.
For both personal and business divorces, Larry is considered an expert in divorce strategies, divorce process management, financial divorce architecture, financial risk management, taxation for divorces, financial divorce forensics, advanced divorce analytics, financial divorce negotiations and mediation, business valuations and sophisticated equity structures. He helps clients shape complex financial decisions, manage communication risks and ever-changing negotiating positions to strategically preserve or grow wealth from these types of transactions.
If You Have a Question
If you have a question, feel free to contact me at [email protected] or 617-680-5222. The call is free. I will spend 30–60 minutes with you. I will provide you an honest assessment as to where I think you are positioned in your divorce process or answer any questions you have. I may provide you some guidance, insight or advice that you can take with you as you wish. There is no obligation to move forward. The phone call is designed to ease your fears, provide you some options to pursue and a potential road to run on that can lead you down a path to achieve a successful outcome.
About Divorce Outcomes
Divorce Outcomes is a specialty services firm that helps people both domestically and internationally manage all of the financial decisions that arise in their divorce process. We are not attorneys. We are financial experts who partner with our clients as their personal financial advocates. We help our clients manage their divorce process, uncover hidden financial risks, architect divorce solutions, manage ever-changing negotiating positions, communicate complex financial matters and close the divorce process as soon as possible with a goal to arrive at the best outcomes possible. Throughout the process we evaluate the current state of our clients’ financial lives with an objective to best reposition their future. We do not sell any products. We simply raise issues that are in our clients best interest. Our clients share with us we:
- unfold, analyze and repackage their financial life so they are well positioned after their divorce
- preserve the value of their business or marital estate
- continuously strive to provide a return on our services
- build balanced financial solutions grounded in evidence
- find ways to make our client, and at times both parties, money through the process
- design their divorce to work for them and their family’s life
- provide mental clarity to make decisions
- reduce the total process time from start to close
- minimize the stress and unpleasant memories that can last a lifetime
As we reach an agreed upon settlement structure, we help our clients identify a fitting attorney who can leverage the financial solution to draft and record the requisite legal documents. Where outcomes are at risk from a traditional process, we function as expert financial negotiators or financial mediators to turn around the situation and achieve our client’s desired outcomes.
This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute formal advice or a recommended course of action as every person’s situation is unique and different. The information here is not intended to be, and should not be, relied upon by the recipient to make a decision without professional guidance.