During your divorce, you spend a lot of time navigating the division of assets. It’s hard enough figuring out how to split things like investment accounts and homes. When things like retirement plans are involved, the process becomes even more complex.
Because of the unique nature of retirement plans, there must also be a unique way to divide them during a divorce. That’s where a Qualified Domestic Relations Order comes in. Keep reading to learn what you need to know about these orders, when you need one, how they work, and how to set one up.
What Is a Qualified Domestic Relations Order?
A Qualified Domestic Relations Order (QDRO) is a court order requiring a retirement plan to be assigned and paid in part to another person after a divorce. QDROs are used to split these plans with ex-spouses and dependents after a divorce.
QDROs are a vital part of an equitable asset division. Retirement plans are an basic form of compensation for many salaried positions. However, they are not typically covered in the standard asset division process because they aren’t monetary or tangible assets. As such, they can’t be given a neat value and split with a partner or given as a concession in negotiations. Furthermore, retirement plan administrators typically cannot pay out funds from these plans without a court order.
A QDRO resolves that issue. This type of decree requires a plan administrator to pay out a certain percentage of the plan’s funds to an alternate payee once certain conditions have been met. QDROs can require a plan to pay child support or alimony as well, depending on the circumstances around the order.
When Do You Need a QDRO?
Not every type of retirement fund requires a QDRO. Certain funds can simply be split into two individual accounts. For example, IRAs are not typically subject to these orders because they are wholly owned by the couple and can easily be divided into separate funds. This is known as a “transfer incident to divorce.”
A retirement plan requires a QDRO when there is another party involved in the running or ownership of the account. Specifically, QDROs are used for plans such as 403(b)s, 401(k)s, and other qualified programs. These types of plans have multiple things in common:
- They are offered by employers to their employees as a benefit of work
- They are held only in the name of the employee
- They are managed by the employer
- They typically have conditions for the maintenance of the account, such as continued employment
These elements make qualified retirement plans challenging to split in a divorce. Since they occupy a unique space in terms of ownership, they can’t be neatly divided like other accounts. However, these plans are a crucial resource for most couples, so they must be divided fairly. That’s where qualified domestic relations orders come in.
How QDROs Affect Divorce Finances
A QDRO can affect your finances after divorce in several ways. If you’re getting divorced through the court system, the judge is likely to implement a QDRO that requires the plan to pay out 50% of the retirement account’s growth from the marriage to the date of divorce. This payout may happen immediately or occur when the account holder or recipient reaches 65.
If a payout happens immediately, the recipient will take ownership of their portion of the retirement plan to use as they please. The most common course of action is to roll over these assets into an IRA to avoid tax losses. This leaves the beneficiary spouse with their fair share of the retirement funds earned by their former partner during their marriage.
QDROs can also split other retirement plan benefits as well. For example, some plans offer survivor benefits for spouses and their dependents. Should the account holder pass away, a QDRO can require these survivor benefits to be paid to an ex-spouse. If this occurs, the account holder’s subsequent spouse will not be eligible to receive those survivor benefits themselves.
How to Set Up a QDRO
Setting up a QDRO is part of the division of assets. If a marriage involves qualified retirement plans, they must be considered during the split. California requires all marital property to be divided equally between spouses, including retirement funds, so a QDRO is typically the best course of action in these situations.
To set up a QDRO, you will need to work with an attorney and the retirement plan administrator. There’s no standardized form for these agreements. As every plan is a little different, every QDRO will also be different. Furthermore, if you’re using a mediator or arbitrator to complete your divorce, or if you have a prenuptial agreement in place, the specific benefits being split can vary. Every QDRO needs to be written specifically for the plan and divorce at hand.
Some plan administrators may have pre-written QDRO templates available that cover the specific benefits of their plans, but not all. Working with a qualified attorney will help you write a QDRO that covers all relevant benefits and splits them correctly.
The other element to consider is precisely what benefits are being split. If you’re working with a mediator or arbitrator to accomplish your divorce, plan benefits are a point of negotiation, just like everything else. You can offer additional retirement benefits in return for other assets or vice versa. Make sure you’re clear on the specifics of the division before you finalize the QDRO.
Don’t Forget a QDRO for Your Divorce
No one should lose their retirement funds just because of a divorce. QDROs are designed to help spouses without qualified retirement plans retain some of their marital funds after they’re separated. These orders are effective, but they need to be approached carefully to ensure that the assets are divided fairly.
If you’re considering separation and your marriage involves retirement plans, a QDRO could be in your future. Reach out to a qualified divorce attorney to learn more about handling QDROs the right way.