We often hear about “Qua -Dros” (actually a “QDRO”) in divorce. QDRO stands for Qualified Domestic Relations Order. But what is that? Why do you need one? The short answer is that if you transfer any pension assets, 401(k)s or 403(b)s without a QDRO we will pay a 10% penalty on the transfer and regular income tax on the whole amount transferred. The penalty and income tax can often amount to approximately 40%. That is a heavy price to pay in your retirement assets.
But there is a say around it. Instead of withdrawing cash from a 401(k) and then paying it to your spouse as part of the divorce, if you transfer the funds pursuant to the QDRO it just goes from the retirement account of one of you to a retirement account of the other. No taxes payable. Of course, if you then withdraw the money, you end up with the penalties and interest. There is a way to pay out the distribution to the spouse who is receiving it as cash without penalty, but it has to be done exactly correctly. Without a properly prepared QDRO you risk substantial expense.
Employee Retirement Income Security Act
The main law that provides this option to avoid heavy losses in the transfer of assets is called the Employee Retirement Income Security Act — ERISA. It is a highly complex law failure to follow its provisions exactly will cause the QDRO to be fail. It only applies to qualified Plans (that is to say, employer sponsored). That is what it is called a Qualified DRO (QDRO). Retirement plans not covered by ERISA (for the most part those of the US military, State and municipal retirement plays, federal retirement plans (Civil Service Retirement System, Federal Employees Retirement System and Thrift Savings Plan). Also not requiring a QDRO are IRAs, and most deferred compensations plans.
The Preparation of a QDRO is a Highly Complicated Matter
The preparation of a QDRO is a highly complicated matter. The attorney first gathers the facts such as the name of the retirement plan, the name of the adminstrator of the plan, and other relevant information. Unfortunately, many divorce mediation clients don’t have the information and don’t know how to get it. It takes a fair amount of prodding to get the information through the client. Then the attorney needs to contact the Plan Administrator to see if they have any special requirements. Large companies often have a form that they want you to use, but most don’t. And so there is often a bit of a struggle between the attorney preparing the QDRO and the staff of the Plan Administrator, who are not always helpful.
At any rate, once the attorney pried the necessary information from the client (you) and the Plan Adminstrator, he (or she) then prepared a draft order, which is shares with the client for review, then submits to the Plan Administrator for review and approval. Some Plan Administrators respond within a week or two, others not so quickly.
Plan Administrator’s Role
The Plan Administrator may want some changes made, or may suggest an entirely different form to use, and so forth. It is difficult to predict how long this process will take. It depends on the level of co-operation from everyone involved.
Once the QDRO is approved by the Plan Administrator the attorney then submits it, with some additional documents, to the Court, for review and signature by a Judge. If we submit the QDRO along with the complete divorce papers they are usually signed at the same time. If, as is usually the case, we submit the QDRO after the Judgment of Divorce is signed, it can take a couple of months for a Judge to sign it. Once it has been signed by a Judge it goes to the County Clerk to be recorded in the County records. That can take anywhere from a week to a couple of months.
Once is has been recorded in the County Clerk’s office I obtain a certified copy of the Order and serve it on the Plan Administrator. The Plan Administrator will then carry out the provisions of the QDRO.
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