If you are contemplating divorce, you already know that one of the issues you will need to navigate is the division of property. Chances are, you are thinking in terms of who gets what: who will stay in the house you’ve shared, who will take which furniture and sentimental items. You may have given less thought to the mechanics of dividing assets: for instance, what does it mean to say one of you will get half of the other’s 401(k)?
In Utah, marital property is divided equitably, which means that usually, each spouse gets about half of the assets accumulated during the marriage. That includes whatever portion of one spouse’s retirement plan was earned during the marriage. Let’s say that you have a 401(k) that was earned entirely during the marriage, and that there is $100,000 in the account. How exactly do you divide that? The answer is a Qualified Domestic Relations Order, or QDRO.
Think of your divorce decree as a “private law” that governs two citizens: you and your now ex-spouse. If one of you does something that violates the decree, you may have to go back to court and may suffer some penalty. But to the extent that a third party (like a retirement plan administrator) is being asked to do something (like divide a retirement account), your divorce decree isn’t binding. The third party has not submitted to the authority of the court, unlike you and your ex-spouse, who consented to have your divorce decided there.
A plan administrator will not divide a retirement account just because an employee’s divorce decree says the account is to be divided. Furthermore, the divorce decree lacks the specific details to direct this complex division. When will the account be divided—now or at some future date? Will the recipient get a lump sum, or monthly payments? How will those payments be calculated? What happens if the spouse covered by the plan dies before retirement? It is much more complicated than simply writing a check for half the amount currently in the account or plan.
A QDRO solves these problems. It is a separate order that binds the retirement plan administrator, and supplies the specific details of how and when the plan will be divided. Note that QDROs apply only to employer-provided retirement plans, those governed by ERISA. Individual retirement accounts (IRAs) are not divided by QDRO.
If you and your spouse have agreed to divide retirement plans, or the court has ordered a plan to be divided after a trial, your divorce decree will probably specify that a QDRO must be prepared. Your divorce attorney may be able to prepare a QDRO for you, but many divorce attorneys do not; they are complex and time consuming, and many attorneys outsource this task to professionals who do nothing but QDRO preparation.
Whether your attorney or another professional prepares your QDRO, the process will probably go something like this:
This all sounds fairly straightforward, and it can be. But it is also common for the process to get hung up at various points. A draft QDRO may sit on a plan administrator’s desk for weeks because of a defect that the QDRO preparer has not been notified about. An ex-spouse may drag their heels reviewing and signing a QDRO.
It is important to stay in touch with your attorney and/or QDRO preparer to keep current on the status of your QDRO. Divorce attorneys have all heard horror stories of QDROs that were ordered in a divorce decree but never prepared, or prepared but never approved, or signed but never sent to the QDRO administrator to be implemented. If the problem isn’t discovered and remedied in time, one party could lose tens or even hundreds of thousands of dollars in retirement benefits to which they were entitled.
If you have questions about QDROs or division of retirement accounts in divorce, please contact Barton Wood to schedule a consultation.