FAQ: What is a QDRO?
FAQ: What is a QDRO? (Guest Blog: Carrie Cole, The QDRO Company LLC)
ANSWER: Dividing a retirement plan pursuant to your divorce will likely require a specific type of domestic relations order, most commonly called a Qualified Domestic Relations Order (“QDRO”)[i]. This special type of domestic relations order is entered with the applicable state court but is does not become “qualified” until it has been accepted by the plan’s administrator. Even after the court grants your QDRO to divide the retirement account, the final decision remains in the hands of the employer’s plan administration. What this means to the divorcing spouse waiting for his or her funds, is that the transfer cannot take place until both (1) the QDRO order has been granted AND (2) the employer’s administrator also approves it. This usually takes a period of one to six months after the divorce to complete.
A retirement plan administrator can reject a domestic relations order if its provisions do not agree with the plan’s rules. It is important to submit a QDRO to a retirement plan administrator as soon as possible, ideally no later than the finalization of your divorce.
Common terminology used within a QDRO include and are defined as follows:
· Defined Contribution Plan - a retirement plan that's typically tax-deferred, such as a 401(k) or a 403(b), in which employees contribute a fixed amount or a percentage of their paychecks to an account that is intended to fund their retirements. The sponsor company will, at times, match a portion of employee contributions as an added benefit. These plans place restrictions that control when and how each employee can withdraw from these accounts without penalties.
· Defined Benefit Plan – a retirement plan that provides eligible employees guaranteed income for life when they retire. These plans are not typically accessible until the employee retires. Normally there is no lump sum associated with this type of plan.
Participant – The employee in the plan.
· Alternate Payee – The non-employee in the plan.
It should be noted that while IRAs such as a Traditional IRA, Roth IRA, Simplified Employee Pension (“SEP IRA”) and Savings Incentive Match Plans for Employees (“SIMPLE IRA”) are considered retirement plans, these plans are not divided by a QDRO and do not receive the same withdrawal treatment in divorce. Therefore, awarding a spouse an interest in a 401(k) Plan may not necessarily be the same as awarding an interest in an IRA.
Finally, after the often-draining process of the divorce itself, many people are tempted to put off having their QDRO entered right away. That can be a costly mistake. Waiting to have your QDRO prepared and entered long after your divorce is final can have disastrous impacts.
NOTES FROM BANFIELD COULING LAW & MEDIATION:
(1) Thank you to Carrie Cole of The QDRO Company LLC (https://www.theqdrocompany.com/) for this important information – which often affects a couple’s largest asset in a divorce or separate maintenance action.
(2) For more information about QDROs and some specific examples illustrating why entering your QDRO as soon as possible is so important, we have provided a link to Carrie Cole’s interview on the podcast, “Divorce: What to Expect “with Marcy Hahn, which we have provided below:
Listen to Featured Guest Interview with Financial Planner & Domestic Relations Expert Carrie Cole from Divorce: What To Expect on Apple Podcasts. https://podcasts.apple.com/us/podcast/divorce-what-to-expect/id1510428190?i=1000482397416
PLEASE NOTE: This blog is not intended to constitute legal, financial or tax advice. We do not recommend making important decisions of the type addressed in this article without specific legal or professional financial advice in advance. We at Banfield Couling Law and Mediation are here to help navigate your legal matter at any stage of your divorce.
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[i] “QDRO” is the term for domestic relations orders that have been accepted by a retirement plan sponsored by a private employer, such as a company or non-profit. Other types of plans may have a different term for this. For instance, you may also see reference to Eligible Domestic Relations Order (EDRO) different Michigan public pension plans, Court Order Acceptable for Processing (COAP) (for federal pension plans), and Military Qualified Court Order (for military pensions).