Divorce involves the division of marital property, and some property is easier to divide than others. The joint bank account can be closed and the contents split right down the middle. Much more challenging, for a variety of reasons, is the division of most retirement plans. If you or your spouse have an employer-provided retirement plan, and it was contributed to during the marriage, that plan (or part of it) is marital property. So how do you divide it?
There are a few layers of complexity involved. Unlike a bank account, you can’t just pull the funds out of a retirement account and split them down the middle—at least not without incurring significant penalties. There’s also the matter of figuring out what portion of the funds in the account are marital property and separate property, because separate property acquired before the marriage doesn’t get divided in the divorce.
Some retirement plans, like 401(k)s, can be divided by the plan administrator. The owner of the 401(k) keeps their share, while the ex-spouse’s share can be rolled into an individual retirement account (IRA). Other types of plans, like pensions, make payments to the ex-spouse at a future date, maybe decades in the future. In situations like that, there are complex calculations involved to determine just what the ex-spouse’s payments should be.
But the most important thing divorcing couples need to know is that just because their divorce judgment says a retirement plan will be divided, the words alone don’t accomplish the division.
What is a Qualified Domestic Relations Order?
If you were awarded part of your spouse’s retirement plan in your divorce, don’t think that you can just put your divorce judgment in a drawer and pull it out in a decade (or two or three) to demand payment. If you do, you may find yourself out of luck.
Employer-provided retirement plans like 401(k)s, pensions, profit-sharing plans and deferred compensation plans are all subject to the Employee Retirement Income Security Act of 1974, better known as ERISA. This federal law requires retirement plans to be divided using a Qualified Domestic Relations Order, or QDRO. The person whose name is on the retirement plan or benefit is called the “participant,” and the other spouse is known as the “alternate payee.”
The QDRO authorizes and orders the retirement plan administrator to redirect part of the benefit from the plan participant to the alternate payee. That’s important, because the divorce judgment can’t direct the plan administrator to do anything: the divorce judgment is only binding on the ex-spouses. So the divorce judgment can tell the parties to the divorce to split up their retirement plans, but only the QDRO is binding on the administrator.
How Do I Get a QDRO?
A QDRO is a fairly complex document, because it needs to specify exactly how and when an asset gets divided. Because of this complexity, many divorce attorneys don’t even prepare their own QDROs, relying instead on professional QDRO preparation services.
There are many steps in the process getting a QDRO implemented, and a breakdown at any one of those steps can result in delays. Some unfortunate ex-spouses have discovered too late that their prepared QDRO was never sent to the judge for signature, or a signed QDRO was never returned to a plan administrator for implementation. It’s important to make sure the process is completed.
In general, the process of getting a QDRO goes something like this: the QDRO preparer contacts the plan administrator to request the plan’s requirements and any available sample QDRO language. The preparer then drafts the QDRO and sends it to the participant and the alternate payee to make sure it is in line with their agreement. If it is, it then goes to the plan administrator for review. If any corrections are needed, the QDRO preparer makes the.
When the plan administrator has given preliminary approval, the QDRO preparer gets the participant and alternate payee to sign the QDRO. It is then sent to the court for signature. The signed QDRO is filed with the court, and the preparer gets a certified copy to send back to the plan administrator. The plan administrator then implements the QDRO, usually after a comments and appeals period. Depending on how efficient and responsive everyone involved in the QDRO process is, the process might take as little as six months, though it is often longer. Federal law does require that a signed QDRO be implemented within a “reasonable time” after it is received by the plan administrator.
If you expect to divide a retirement plan during your divorce, or your divorce judgment calls for division of a plan but you’re unsure how to get started, contact our law office to schedule a consultation.
You may also be interested in: Keeping Retirement Benefits Out of Probate