A Qualified Domestic Relations Order (QDRO) is a necessity due to the interaction between state family law and federal tax law. Under federal law, retirement plans may not disburse funds to anyone but the plan participant if one of these orders is not in place.
Which means if one of these orders is not in place your ex’s retirement plan will have no obligation to pay you anything, even if you think you’re entitled to it.
QDROs are not automatically created when divorce decrees are. Sometimes the language of the agreement matches the requirements of the retirement plan well enough to serve. Unfortunately the QDRO doesn’t go into effect until the plan agrees it qualifies under their regulations, and accepts it.
Every single retirement plan has different regulations, which means it’s important to avoid leaving the production of this vital document to chance. You and your lawyer should check the plan requirements before your attorney drafts the order.
General requirements state that QDROs must contain the following important pieces of information:
- The name and address of the plan participant.
- The name and address of the alternate payee, which is the member of the divorcing couple receiving a portion of the funds under the terms of the divorce decree.
- The dollar amount or percentage amount of the benefit to be paid to the alternate payee.
- The number of payments the alternate payee should be receiving, and/or the number of years the plan must make payments to the alternate payee.
- The QDRO must not demand any payments that are prohibited by law or the terms of the retirement plan.
Keep in mind your divorce decree should cover each and every one of these issues when you are negotiating the way retirement funds will be divided.
Here are a few other things you need to know.
- Get your QDRO ASAP. If a plan starts paying your ex before you turn in a QDRO then they must pay you every payment you’re due after the QDRO goes through, but will not make retroactive payments…even if you should have been receiving payments for ten years.
- If you haven’t filed a QDRO by the time the participant dies then you will never be able to recover any money from the retirement plan.
- You should usually turn the QDRO over to the retirement plan the moment you receive yours.
You need to be thinking about taxes when your attorney starts drafting your QDRO. For example, you could just take a lump sum, but you may suffer withdrawal penalties which are as high as 10%.
It’s usually better to wait, allowing the plan to earn interest, receiving disbursements when you retire.
However, you can draft both the divorce agreement and the QDRO in a way that allows you to roll your portion over into your own retirement plan. This will give you control of the money right away, but will ensure you have it when you need it to retire.
Incidentally, failing to draft a proper QDRO—or failing to file one at all—is one of the big mistakes people make when they try to handle divorces by themselves. And once the mistake is made, it’s very difficult, and very expensive, to go back and fix it. Sometimes, it even becomes impossible.
The need for court orders like this one is a major reason why you need a qualified divorce attorney by your side throughout the entire divorce process. Contact our office today to schedule a consultation. We want to hear about your unique situation so we can help you get the divorce outcome you deserve.