Qualified Domestic Relations Orders (QDRO)
A QDRO (pronounced “kwa-dro”) is a written agreement about a retirement account between a divorcing couple that spells out who gets how much of the retirement in that specific account. The account can be one of two types:
- Defined Contribution Plan (DCP) such as a 401(k) or a 403(b
- Defined Benefit Plan (DBP) such as a pension plan that pays a monthly benefit after retirement
Why do you need a QDRO?
Without a QDRO, withdrawals from DCPs and DBPs are subject to federal taxes and early-withdrawal penalties.
The QDRO spells out how much of the retirement account each spouse will own as well as what rights each spouse has regarding the retirement plan. Rights can include such things as survivorship benefits in a pension plan. Before the QDRO can be written, the spouses must come to an agreement as to how to divide the retirement account benefits. In a DCP, the balance may be divided in either dollar amounts or percentages. In a DBP, the benefits are usually divided in percentages.
Note: QDROs are not used to divide IRAs in divorce.
QDRO rules and process
QDROs are a result of federal law, which governs retirement plans, while divorces are subject to state law. A judge cannot require a retirement plan to do anything that the plan’s own rules do not permit.
Each plan has its own unique rules. The QDRO must comply with these rules. Most plan administrators will provide the plan participant with their rules, their QDRO procedures, and a sample QDRO, called a “model order”.
In a divorce, it is important to get going on the QDRO early in the divorce process. It can take weeks to obtain the rules, procedures, and model order. A QDRO cannot be written until these documents are on hand. After the QDRO is written, the plan administrator can take weeks or months to pre-approve the document.
After the QDRO has been pre-approved by the plan administrator, QDROs it must be signed by a judge and then formally submitted to and approved by the plan administrator. Only then is the QDRO considered the final word on the division of retirement assets. Without a signed and approved QDRO, the ex-spouse is entitled to nothing.
Not a do-it-yourself project
The QDRO is one area where do-it-yourself is not advised. Even though the plan administrators may provide sample QDROs, those samples commonly do not address the issues that are important to the non-employee spouse. QDRO experts know what to include in the QDRO to cover these omissions.