What is a QDRO?
- A QDRO can be simply defined as a domestic relations order which creates or recognizes an alternate payee’s rights to receive benefits payable to a participant under a specific retirement plan.
- In plain English, the QDRO is the legal document necessary (separate from the Judgment of Divorce) to transfer money from an employee’s retirement plan to their former spouse, pursuant to a domestic relations matter. The recipient (referred to as the “alternate payee”) of the money can also be a child, dependent or current spouse of the plan participant.
Who determines if an Order is in fact, “qualified”?
- It is technically only a DRO (Domestic Relations Order) until it is approved by the Plan administrator. Neither the signature of the parties nor that of the State Court Judge (while necessary) is what “qualifies” the Order. Under Federal Law, ERISA (The Employee Retirement Income Security Act, as amended) granted the Plan Administrator final say as to whether a DRO is qualified and thus gives the Plan great authority in a divorce matter. The Plan’s role cannot and should not be underestimated by the parties in a divorce matter.
Why has my attorney sent me to an outside firm to have my QDRO prepared?
- Family Law is a very specialized and complex area of the law—your attorney is a specialist in all issues relating to property division, child support, spousal support and the particulars of your case. It would be extremely difficult for an attorney to also know everything relating to pensions and retirement plans in general as well as the specific plans that we deal with every day. As QDRO experts, we speak the language of the Plan Administrator. By referring you to us (or another QDRO expert) your attorney is protecting your interests by ensuring you get the best and most cost-effective pension advice.
If I hire you, do I still need to work with my attorney?
- Absolutely, yes! At Divorce Solutions, LLC, we are not attorneys and therefore, we will not accept a case if there isn’t an attorney involved to review our documents and enter them with the Court. We specialize in pension and retirement plans—your attorney will review our document for legal correctness and give you any legal advice necessary relative to the documents.
What is your firms’ turnaround time?
- Once we receive all necessary information and full payment for all Orders, it generally takes us 3-4 weeks to prepare the documents and mail them to the attorneys. We would be happy to send you a copy as well; however, the originals always go to the attorneys. If you need the Order expediated, we will prepare the Order within 1 week for an additional $150 (per Order) charge.
How long will it take before I receive my money?
- Once the QDRO arrives at the plan administrator’s front door, it can sit on someone’s desk for as long as they deem reasonable before they make a decision. That could be 2 weeks, 6 months or a year. In fact, there is no time limit in which they have to make a decision unless the participant is retired. In that case, the Plan Administrator has 18 months to make a decision as to qualification. Many clients expect to receive their money right away and are unpleasantly surprised when they discover it may take 6 months or more.
Can you guarantee me that my QDRO will be approved the first time it’s drafted?
- No, but we can guarantee that we will revise it as many times as are necessary (at no charge) to ensure that it gets approved by the Plan Administrator and carries out the intent of the parties (as expressed in the Judgment of Divorce).
What is a Defined Contribution Plan?
- In a defined contribution plan, the employee and sometimes the employer, put money away on a pre-tax (and sometimes post-tax) basis into an investment account that will grow income tax deferred until retirement. The value of the account will fluctuate based on the investment performance of the underlying assets, be they mutual funds, stocks, bonds or cash. The management of the account is generally up to the employee. There is generally a 10% penalty assessed for withdrawal of these plan assets when the employee is younger than 59 ½.
What is a Defined Benefit Plan?
- A defined benefit (pension) plan is the type of plan where the employer promises the employee “X” dollars per month for the rest of their life in retirement. In general, the longer they stay at the company and the higher their salary, the larger the monthly payment. Qualified pension plan benefits are guaranteed by the Pension Benefit Guarantee Corporation (PBGC) up to a set monthly dollar amount ($3,971.59 as a Single Life annuity for those ages 65 and older for plans terminating in 2006). Some companies allow their employees to contribute to the pension plans in order to increase the monthly payments. It is extremely important to note that the present value of the employee’s contributions is NOT the actuarial equivalent of the pension’s present value. It is generally worth much more than that and should be evaluated by a pension expert.
- There are several ways to address pensions in the context of divorce cases. The first is to place an actuarial value on the pension and assign it to one party with an offset to the other. The second is deferred division, which happens via a QDRO.
Is there more than one way to divide a pension?
- There are two basic ways a pension can be divided via a QDRO, although, again, there are plan-specific exceptions. The first is the separate interest approach.
- In this approach, the alternate payee controls the timing and receipt of his or her benefits. In other words, the alternate payee may initiate payments upon the participant’s earliest retirement date whether the participant is in pay status or not. Payments are generally based on the alternate payee’s life expectancy and once begun will not cease, even upon the subsequent death of the participant. It’s important to keep in mind that even in this method of division, pre-retirement survivor benefits must be preserved to protect the alternate payee’s interest in the plan. It is often possible for the alternate payee to name a subsequent beneficiary to their benefits upon their death.
- Let’s compare and contrast with the other method; the shared benefit approach. In this approach of division, the alternate payee may not commence benefits until the participant is in pay status and benefits will be based on the joint life of the parties. Both pre and post retirement survivor benefits must be set aside for the alternate payee in order that payments can continue beyond the death of the participant. Upon the death of the alternate payee, there is an automatic reversion of benefits to the participant, either pre or post-retirement. It’s important to note that if the participant is already retired, this is the only option available to the parties.
Will I have to pay taxes and/or a penalty for early withdrawal if I take a distribution from my ex-spouse’s retirement plan via a QDRO?
- Anyone who receives payments from a defined benefit plan (see above) will be taxed on those distributions. There will not be any penalties assessed.
- One of the most interesting aspects of dividing defined contribution plans pursuant to a divorce is the little known exception to the 10% penalty that normally applies to pre-59 ½ distributions. Pursuant to IRS Regulation 72t2c, a distribution to an alternate payee, pursuant to a QDRO will avoid payment of the 10% penalty. Ordinary income taxes will still be assessed to the alternate payee, at his or her highest marginal tax rate; however, the 10% penalty will not apply.
- This presents a unique opportunity for spouses to pay off debt, free up cash in a non-liquid estate or even pay legal fees. Let’s review an example:
- Suppose that Mary is to receive $50,000 from her husband’s 401k pursuant to their divorce decree. She needs $20,000 in cash and wishes to roll over the remainder ($30,000) in a tax free transaction to her IRA. The $20,000 will automatically be reduced by 20% for estimated taxes but she will receive the $16,000 without being assessed a 10% penalty for early withdrawal. Once the $30,000 is rolled over into an IRA, she no longer has the option of taking a penalty-free distribution. Of course, Mary should consult with a tax advisor before she makes any decisions as she may end up owing more (or less) than the $4,000 with-held for taxes.
Is it really necessary for me to have the QDRO prepared now if my ex-spouse is years away from retirement?
- Yes, timely entry of the QDRO is critical. Once the participant has retired or re-married certain options for the alternate payee may no longer be available. Even more important is entry prior to the death of the participant. Remember, the only document that can assign benefits to an alternate payee is a QDRO. The Judgment of Divorce is not sufficient. If the QDRO isn’t entered and approved prior to the death of the participant, you can assume that the alternate payee will receive nothing.