Qualified Domestic Relations Orders

Qualified Domestic Relations Orders

Retirement plans such as 401(k)’s, defined benefit pension plans, and other hybrid employer sponsored retirement savings vehicles are often among the largest assets to be divided during the division of a martial estate. Many of these plans are governed by a set of federal law known as the Employee Retirement Income Security Act of 1974 or ERISA. ERISA allows an Alternate Payee such as a former spouse to receive a portion of the employee’s benefits with a court order. A Qualified Domestic Relations Order (QDRO) is the court order required to give notice to a retirement plan administrator that an Alternate Payee is entitled to a portion of the plan. Without a QDRO the plan administrator cannot legally make payments to the Alternate Payee.

Who Should Draft My QDRO?

Drafting of QDRO’s is an important step in the divorce financial planning process. Financial planners have specific and far reaching knowledge of retirement plans and the underlying laws that govern them but are ill-equipped for drafting the actual Domestic Relations Orders. The drafting process is best left to a professional specializing in drafting such documents. These professionals often have experience working for the large plan administrators and have inside knowledge of the processes.

For a QDRO to be valid and accepted by both the court and the plan administrator it must contain specific requirements under the law as well as be tailored to that specific plan. Retirement plans may even reject court certified orders that were not pre-approved by their own staff. For this reason it is necessary for a draft to be sent to the plan administrator for pre-approval prior to seeking court certification.

How Will a Financial Planner Help Me?

Divorce financial planning will help each party to understand the process and be sure their rights are protected in the draft documents. The alternate payee and plan participant will need to consider their options for managing benefits from a defined contribution plan. Benefits should be invested in securities in order to earn returns. Tolerance for risk and time horizons may have changed for both parties and re-visiting these topics is vital to post divorce success. It may be worth discussing the options for distribution of benefits from a plan should cash be needed at the time of the division. It is also vital to understand the lump sum, annuity, and other options available for benefits under a defined benefit plan. These are ideal topics to pursue in discussions with your financial advisor during the divorce financial planning process.

The QDRO Process

The QDRO process can take many months to complete which makes it increasingly important that the process is started as soon as possible. Following is a timeline of the process you might expect when undertaking the filing of a Qualified Domestic Relations Order.

1. QDRO Specialist drafts the Domestic Relations Order in accordance with specific plan provisions and the agreements reached by parties to the proceedings.
2. The Draft Qualified Domestic Relations Order is submitted to the Plan Administrator for pre-approval.
3. The Plan Administrator responds to the drafter with any necessary revisions.
4. Requested revisions are made to the QDRO and the revised copy is sent to parties and attorneys for review and signature.
5. The approved QDRO is signed by both parties and sent to the court for the judge’s signature.
6. A copy of the singed and court certified QDRO is sent to attorneys or parties.
7. The certified singed copy of the QDRO must be sent to the Plan Administrator for processing.
8. The Plan Administrator will send a letter to the participant and alternate payee with instructions on how to access the plan and a timeline for completion of the division. It may be necessary for the Alternate Payee to stipulate an outside account for benefits to be rolled to.
9. The Plan Administrator calculates the division of the plan pursuant to the QDRO and creates a separate account for the Alternate Payee.
10. The Alternate Payee will receive confirmation that their benefits have been partitioned into a separate account or rolled over into the account previously stipulated.

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Our firm does not provide legal or tax advice. Be sure to consult with your own tax and legal advisors before taking any action that would have tax consequences.