Qualified Domestic Relations Order (QDRO)

[pronounced Quad-row] on the street.)  And more importantly (because let’s be honest, you don’t really care, except for the fact that you need one) why do I need one?  According to the United States Department of Labor:

“A ‘qualified domestic relation order’ (QDRO) is a domestic relations order that creates or recognizes the existence of an alternate payee’s right to receive, or assigns to an alternate payee the right to receive, all or a portion of the benefits payable with respect to a participant under a retirement plan, and that includes certain information and meets certain other requirements.”  [ERISA § 206(d)(3)(B)(i); IRC § 414(p)(1)(A)]

This is why we all hate lawyers, right?  Translated into English, this is saying that a QDRO enables someone, who is not the person who owns the account, to receive, among other things, money from the plan, as long as certain requirements are met.  Now for you kinetic learners out there, here’s a real-life example.  Mrs. (soon to be Ms.) Smith has a 401(k) thorough her employer (yes, I am a feminist.)  Mrs. Smith, and only Mrs. Smith can be on the account, have access to the money, and decide what she wants to do with the money, that’s how all 401(k)s work.  Mrs. Smith and Mr. Smith are divorcing and decide, whether through mutual agreement, mediation, a long-drawn out court battle, whatever, to divide Mrs. Smith’s 401(k) 50/50.  So they can just write Mrs. Smith’s company a nice little note asking them to please give Mr. Smith half of the account, right?  No!  Haven’t you been paying attention?  Lawyers do not make anything easy!  You must have a Qualified (for the type of plan it is, i.e. pre-tax dollars) Domestic Relations Order (the type of court order it is) to divide the account and give Mr. Smith his percentage.  That was there is no taxable event created by the distribution of funds out of the account.  Keep in mind that the person receiving the money does have to move it into their own qualified account to avoid a penalty, if they are under 59 ½, and it being taxed as ordinary income.

How do I know if I need one?

Someone mentioned to you that you may need one, no one Googles “QDRO” out of the blue, so you probably need one, but not always.  I have found that most pension plans and private company benefit plans (401(k), 403(b), 457, etc..) need one.  Federal and State employee retirement will almost certainly need one (I never say always, but this one is pretty close.)  Military pension plans require a MPDO (Military Pension Division Order) and a spouse can only be added if at least 10 years of marriage overlap 10 years of service.  An Individual Retirement Account (IRA) and a ROTH IRA will never need one.  They can just be moved from one IRA (or ROTH) to another.  Also, any investment that is not a retirement account, such as a your E*Trade account or your Google stock (you wish!) do not need a QDRO to be divided.

In addition (you’re not going to like this) most pension plans also require a Joinder – that is, additional court forms that “join” the plan to your divorce action.  Why?  No one knows.  Not that I have ever spoken to anyways.  But don’t stress, if you do need a Joinder you will have most likely given up (or never attempted) to do the QDRO on your own and the person you hired will handle this for you.

C****!  How long is this going to take?

Are you still with me?  That’s impressive.  I do this for a living and I am getting bored.  Okay, here’s what’s involved with the process of getting a QDRO issued and a plan divided.  I’m going to assume you have hired someone to draft it, but if you are DYIing it, change “QDRO preparer” for “I/Me.”  Keep in mind that a QDRO can be filed concurrently with a Marital Settlement Agreement (MSA), or any time after the MSA has been approved by the court.

1. The QDRO preparer does some research to confirm that a QDRO is needed (crucial step, make sure whoever you hire does this, because sometimes one is not needed, and the money to draft and file is wasted) and they find out if there is anything specific that the plan provider wants included in the QDRO.
2. The QDRO is drafted by the document preparer based on the terms decided in the MSA.
3. The QDRO is sent by the document preparer to the divorcing couple (aka the parties) for approval.
4. Once approved by the parties, the QDRO is sent by the document preparer to the plan company for approval.
5. Once approved by the plan sponsor, the QDRO is returned to the document preparer.
6. The document preparer has both parties sign the QDRO, and the Alternate Payee’s (the person receiving the money) signature must be notarized.
7. The document preparer files the QDRO with the court (the same court where the Petition for Divorce was filed.)
8. The court takes their sweet time approving the QDRO.
9. The court returns the QDRO to the document preparer.
10. They document preparer provides the parties and the plan sponsor with a copy of the QDRO.
11. The plan sponsor requests and additional information from the parties (for example, I do not include the parties’ social security numbers in the QDRO, so they need to provide that to the plan sponsor separately.)
12. The plan sponsor divides the plan according the QDRO.

As you can see there are a lot of moving parts with getting this done, so an estimate of how long it will take is almost impossible.  The two biggest factors tend to be A) the size of the company – do you work for IBM, who has handled a ton of these, all day long, everyday? Or Joe’s Hardware Store, that doesn’t even know what one is? and B) the court – the slowest living organism on the plant.  You are dealing with a government agency that is understaffed, underpaid, and overworked.  Patience is key.

Should I hire someone or DYI this bad boy?

It’s not so much that getting a QDRO done is hard, it’s more technical that anything else.  Whether you hire someone to do it for you, or do it yourself, really depends on how patient you are and what your time is worth.  If you are unemployed or retired, and enjoy this type of thing, have at it.  If the tediousness of government bureaucracy drives you crazy, you may want to consider hiring someone; especially if doing it wrong means your ex (or their attorney) will be breathing down your neck.  I know, you’re mad that you have to pay more money to give away your money.  Divorce is a sucker punch, no doubt about it, but you’re in the home stretch, the light at the end of the tunnel is getting brighter!  I would suggest that you not pay an online company, in which you never get to speak to a live person, because often the court filing isn’t included, and you will have no one to turn to if you, or your plan company, has questions.  You also don’t need to hire an expensive attorney to handle it, there are document preparers that can draft it for you at a much lower rate (full disclosure, I am one of those people) just make sure they are familiar with retirement plans and are a licensed and bonded Legal Document Assistant.

Article written by Keeley Landes, Financial Adviser and Legal Document Assistant extraordinaire, San Diego Legal Documents