Decoding the Mystery of QDROs: Do You Really Need One and What Does it Involve?

You and your spouse have almost finished settling your divorce when your attorney or mediator drops unexpected news: you need something called a QDRO. And guess what? It's going to cost you extra. Hold up! What exactly is a QDRO?

Understand it or not, the QDRO is the final obstacle in your divorce journey because it ultimately is the legal tool to divide certain assets like 401(k) plans, 403(b) plans, pensions, 457 programs, deferred compensation plans, and some RSU (restricted stock unit) accounts. When a divorcing spouse has to share a qualified retirement account, a legal document known as a qualified domestic relations order, or QDRO, is needed. A QDRO must be prepared and filed to the plan in order for a Qualified Retirement Account to allocate all or a portion of the funds to a non-employee spouse. This assignment must first be made in the divorce judgment.

However, keep in mind that a QDRO is not necessary for Individual Retirement Accounts, or IRAs. Legally, all that is required for an IRA to be divided is your divorce judgment. But even then an IRA can use a QDRO to take advantage of a little-known concept presented by divorce to avoid withdrawal penalties.

MAKE NOTE…you have ONE chance to withdraw funds from a retirement plan without incurring penalties if you receive retirement assets from a former spouse via QDRO. The withdrawal before the age of 59-1/2 will not incur the typical 10% penalty, although it will be considered taxable income. If you wish to be able to accomplish this from an IRA or the employer-sponsored account, then you must use a QDRO! Yes, a QDRO!

In my practice, I assist clients in the creation of QDROs by serving as their advocate with a QDRO lawyer I have investigated and found to be the most reasonable. I have learned about the numerous dangers that QDROs can provide, as well as, how frequently mediators and attorneys fail to address these issues during settlement negotiations. Below is a brief overview of some of the details that are frequently disregarded.

·      Is the non-employee spouse eligible to get a lump sum payout when they retire?

·      Would the non-employee spouse continue to get benefits if the employee spouse passes away?

·      Have any unpaid loan sums been considered?

·      When dividing a 401(k), what day does it actually happen? Are the earnings or losses from that             point forward included?

·      Does the pension plan create a separate account for the non-employee spouse so they can pick         their own beneficiaries and payout options? If not, have you taken any steps to shield the non-           working spouse from early retirement penalties?

As you can see, a QDRO's waters are dangerous and not recommended for beginners. Buyer beware, too! QDROs can cost between $500 and $3,000. The language of each plan's QDROs must adhere to extremely particular standards, so it is imperative that the preparer possess a copy of the plan documentation on hand before beginning to assure compliance. If the plan permits it, you should make sure that the QDRO will be PRE-APPROVED to avoid rejection and additional costs for a proper re-do.

Once the judge has approved your decree as final, you send the completed QDRO to him or her as well. Only when it has been signed is it ready to be submitted to the plan. The non-employee spouse will then be contacted to obtain instructions for the disbursement or to learn the name of the new account created on their behalf.

The QDRO process can be complex. It's crucial to have a professional guide you through it to avoid falling prey to opportunistic individuals who recognize your need for assistance and aren't hesitant to charge exorbitant fees, sometimes as high as $3,000.



Don't hesitate to reach out to us if you're in need of a precise, affordably priced QDRO. We're here to support you every step of the way.