Often in a marriage, particularly a long term marriage, a pension or 401(k) plan is the largest asset and that asset is divided between the plan participant spouse and the other spouse. To do that, a QDRO must be prepared. Here are some tips for saving money in divorce and making sure that the QDRO is prepared correctly.
WHAT IS A QDRO?
Generally, a QDRO, or a Qualified Domestic Relations Order, is an order to distribute part of a retirement plan, such as a pension or 401(k) plan, to someone other than the employee/plan participant. A QDRO must be prepared, approved by the plan administrator, and signed by the judge in a divorce case.
WHAT YOU NEED TO KNOW
QDROs require expertise
Errors are often made by those who have little experience with QDROs. Unfortunately, this applies to most family law attorneys, and those that attempt to prepare one for their clients risk preparing a document that cannot be executed but no one knows this until 20 or 30 years into the future when it’s too late. If your attorney, or your spouse’s attorney, says they will prepare the QDRO, don’t be afraid to ask what their experience level is. This is a case where many attorneys don’t know what they don’t know. Most of the pitfalls relate to pension plans because the plan terms can differ. With defined contribution plans, such as 401(k) plans, participants have an account, rather than a promise to pay like with pension plans, and distributions are usually made shortly after the divorce is final, so there may be the opportunity to correct errors.
The responsibility of preparing the QDRO should be spelled out
The settlement agreement should specify who will draft the QDRO and who will pay for the preparation of the QDRO. If the parties agree to use a joint QDRO expert, that expert should be selected and named in the agreement. Similarly, if one of the attorneys will be drafting the QDRO, it is important to indicate that as well.
Don’t overpay for the preparation of a QDRO
This goes along the lines of requiring expertise. I’ve seen attorneys, particularly young attorneys, try to take on a QDRO and go through draft after draft with the plan administrator, who must approve the QDRO, all the while charging the client for their errors. There are many affordable QDRO preparation companies out there that have prepared thousands of QDROs, one of which could very well be on the same retirement plan as yours. If you have been financially smart and included a Certified Divorce Financial Analyst in your divorce process, your CDFA can facilitate the preparation of a QDRO with one of these companies very affordably.
IRAs don’t require a QDRO
If your attorney tells you that you need a QDRO to divide an IRA, that is a mistake! IRAs are not qualified retirement plans and the account custodian only needs to see the divorce decree along with the settlement agreement to distribute the IRA funds.
QDROs for a government retirement plan are different
Government plans have their own specified documents used to divide pensions, and many preparers don’t understand the difference. Because of the volume of plan participants, government plans sometimes use a form, which isn’t discovered until the QDRO is submitted for approval. Best case scenario is this just results in a waste of time and money and does not result in a loss of the right to the funds by the ex-spouse.
The QDRO needs to be prepared timely
the divorce process is exhausting and when your divorce is final you might want to take a break. I get it and I can relate. But that is a mistake and you should not delay getting your QDRO prepared. Better yet, if it can be prepared before the settlement is final, errors and oversights can possibly be corrected. Why should you not delay? If the QDRO has not been prepared and signed by the parties, and one of the parties dies, there could be a big argument about whether the new spouse, the estate, or the children are supposed to get the funds from the retirement plan. This could lead to litigation that could have been avoided.
But what is the biggest error made when there needs to be a QDRO? That is not getting the plan documents and understanding the terms of the plan with regard to survivor benefits, COLAs, separate accounts, early retirement and also improperly valuing the marital portion of the benefit. These have less to do with the physical preparation of the QDRO as they have to do with correctly and thoroughly writing up the terms of the pension division in the settlement agreement, so they can then be written up in the QDRO. A QDRO preparer cannot write in terms after the fact that were not specified in the settlement agreement. That is where the expertise of a CDFA, and an experienced QDRO preparer come in. You don’t know what you don’t know until it bites you. Dividing a pension is complex, and it requires financial expertise, time and attention during the settlement process.