QDROs -- Some Frequently Asked Questions
Why can’t the retirement plan be divided or transferred just like a bank account or an investment portfolio?
Because the laws around retirement plans prevent creditors from getting at them and make them exempt from income taxes. They are protected assets under federal law. Before 1984, divorce courts had no authority over retirement plans. In 1984, a new law allowed retirement plans to be divided between spouses in a divorce or legal separation. The created the requirement that any divorce transfers had to be part of court order called a “qualified domestic relations order,” or QDRO.
What is a QDRO?
A QDRO is a written court order that specifically details how a retirement plan is to be divided. To read a sample click here. Each QDRO must completely describe how the retirement benefit is divided, and it must be consistent with the terms of the retirement plan itself. Typical QDROs are three to ten pages long.
And by the way, people pronounce it “cuadro” or “quadro”.
Why do I need a specialist to draft the QDRO?
Because it’s complicated. Every retirement plan is a little different. And there are many different types of retirement plans – – 401(k), 403(b), pension, tax-deferred annuities, employee stock ownership plans, deferred compensation and others. Some plans make lump-sum payments, others pay just a monthly payment in retirement years. The QDRO cannot require a plan to pay anyone more than, or sooner than, the plan would otherwise pay to the participant. So drafting the QDRO requires someone who understands divorce law, the type of plan being divided and the particular terms of the plan. Most lawyers don’t have that level of expertise. Rather, to draft a QDRO fast and accurately, you need an expert who works on QDROs as a regular, everyday part of his or her law practice.
Do I need more than one QDRO?
Generally, a separate QDRO is required for each retirement plan being divided. So, for example, if you have a 401(k) plan and your spouse has a pension plan, and if the divorce calls for both retirement plans to be divided, then two separate QDROs will be required, one for each plan.
What is the normal process for a QDRO?
Part of your final agreement or judgment will describe how retirement plans will be divided (for example: “wife is entitled to 50% of husband’s 401(k) plan as of the date of this agreement”) But this general language is not enough for the retirement plan to act on – – the plan needs the details of a QDRO. So you should retain a QDRO specialist as early as possible to have the QDRO ready to submit with the final divorce judgment. For more of the details about the QDRO process click here.
How long does it take?
The usual QDRO process, from start to finish, is two to six months, assuming it goes smoothly and everyone cooperates. The process involves a lot of people – – the two parties, their divorce mediator, their lawyers, the QDRO lawyer, the plan administrator, and the judge. The process can get stalled when anyone takes longer than usual. If you are the former spouse and you are expecting money out of the QDRO (for example, you are getting some of your spouse’s 401(k) plan), don’t spend the money before you receive it.
What are the tax aspects?
The answer depends on exactly how you want it, NO taxes if the money stays in; OWE taxes if the money is removed (in QDRO lingo “distributed”).
- If the money being transferred stays in a retirement plan, NO taxes are owed. Just like the money in the plan, there are no taxes until the money is taken out of the plan. So if the former spouse would rather defer all taxes, he/she can “roll over” any lump sum distribution tax-free to an IRA, where the funds can remain invested and continue to grow tax-free until retirement.
- Monthly pension payments from a Defined Benefit Plan or a federal or state civil service plan cannot be rolled over into another plan or IRA. They are taxable to you when received.
- But if there are cash distributions from a retirement plan, payments to a former spouse pursuant to a QDRO are taxable when received. The amount taken will be subject to automatic 20% federal tax withholding, to be credited against the former spouse’s final tax bill for that year. There can be a tax-break: the usual 10% tax penalty for early distributions (under age 59½) from a retirement plan does not apply to a distribution pursuant to a QDRO. So if the former spouse is needing the money for other reasons (e.g., to pay debts or lawyer fees or to buy a new house), taking a lump sum distribution pursuant to a QDRO will avoid the 10% penalty, even if the distribution is still subject to income tax.
You must request this immediate distribution prior to rolling any remaining funds into your own qualified plan or IRA. If you first roll the funds over into your own plan or IRA and then withdraw them from your own Plan, you may needlessly re-subject yourself to the 10% penalty. (Note: The 10% penalty is mandatory and there is no way to avoid it if your spouse’s plan being divided is an IRA rather than a 401(k) or similar plan).
Twenty percent withholding
If you take a cash distribution from your former spouse’s plan rather than rolling the funds over into your own retirement plan, the plan is required by federal law to withhold 20% of the amount you receive for federal income taxes. This is similar to having federal income tax withheld from your paycheck. You will be able to claim the amount which the plan withholds on your federal income tax return when you file it the year following the payment to you.
What types of retirement plans are subject to QDRO’s?
All types. Private (corporate) pension and union benefits plans, including but not limited to 401(K), 403(b), 457, defined benefit monthly payment, TIAA/CREF, etc., may be divided by QDRO’s pursuant to a Federal law called ERISA. Federal and state civil service plans and Railroad Retirement Plans may also be divided by court orders (although these are not technically “QDROs”, all of the concepts are the same).
What types of retirement plans are NOT subject to QDRO’s?
IRAs and Social Security benefits are not divided by QDRO.
For details about Social Security see my article, “Social Security Retirement Benefits: The Last Insult of a Sexist Society.”
IRAs can be divided by agreement. All IRA plans will supply you with the forms they want to be signed and notarized before splitting the money. Virtually all IRAs require you to submit your Divorce Judgment before they will split the account. The obvious advantage of this is that no QDRO is needed, saving time and expense. The downside is that you must wait until the judge signs your divorce papers.
Why should I get a QDRO now? Why can’t I wait until my former spouse retires or until I need the money?
If you delay in obtaining a QDRO, you may lose all of the benefits awarded to you in your divorce. Your rights may be lost if your former spouse does any of the following before your QDRO is submitted and accepted by the plan:
- Quits or is fired
- Withdraws funds from the Plan before retirement
- Takes out a loan secured by the Plan account
Can I get an immediate cash distribution from the plan?
This depends on the type of plan involved. 401(k), 403(b) and 457 Plans (also known as Defined Contribution Plans), IRA’s, ESOP’s and Thrift Savings Plans usually permit cash distributions. Most pension plans (also known as Defined Benefit Plans) and federal civil service plans only permit monthly payments, not lump sums. A QDRO cannot override the terms of the plan itself which specify the form in which payments can be made.
What is the Abel QDROs fee?
All of my work is done on a fixed fee basis of $750.00 per QDRO or $1,400 for two QDROs ordered for the same couple at the same time.
I will never charge a client over our flat fee for any of my services. There are NO charges buried in the fine print.