What is a QDRO (And Why Do I Need One)?

Cut money on plate

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.

What Does a QDRO Do That My Divorce Decree Doesn’t?

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 qualified domestic relations order's apply only to employer-provided retirement plans, those governed by ERISA. Individual retirement accounts (IRAs) are not divided by QDRO.

How Does a Qualified Domestic Relations Order Work?

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 Qualified Domestic Relations Order 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:

  • The preparer will contact the retirement plan administrator regarding their QDRO procedures. In many cases, the plan administrator will send sample language for the order.
  • The preparer, using the information from the plan administrator, will prepare a draft QDRO. This will be sent to you and your ex-spouse. You should review it, with your attorney if necessary, to make sure it accurately reflects any agreement you had with your ex-spouse regarding division of retirement accounts.
  • When both parties agree that the draft QDRO reflects their settlement/divorce decree, the retirement plan administrator will review it. If the QDRO complies with the rules of the plan, the plan administrator will give preliminary approval.
  • Once the QDRO has preliminary approval from you, your ex-spouse, and the plan administrator, it will be submitted to the court for a judge’s signature and filing with the court.
  • The preparer sends a certified copy of the QDRO to the plan administrator.
  • The plan administrator reviews the QDRO that the court has signed and implements it, dividing the account according to the terms of the QDRO. Before the QDRO is implemented, there may be a period of time in which interested parties can make comments or appeals. Once this time has passed, the QDRO will finally take effect, and the account will be divided.

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.