What You Need to Know About “QDROs”
This is a guest post by Clark Williams of Heltzel Williams, P.C. Clark is a QDRO attorney and also practices business law. Clark can be reached at 503-585-4422. Please note that Forrest Collins is not a QDRO attorney and is therefore unable to assist in the drafting of QDRO’s.
So, you are about to be divorced or legally separated and one of the assets to be divided is a retirement plan sponsored by your employer or your spouse’s employer. Your lawyer says that you need a “QDRO” (pronounced “qua’-dro”) to make the split, and that a specialist is required to draft it.
You ask your lawyer: “What is a QDRO, and why can’t you do it?” Those are good questions! This article is intended to answer those and other basic questions about dividing retirement plans in divorce.
- Why can’t the retirement plan be divided or transferred just like a bank account or an investment portfolio?
Because retirement plans are uniquely protected assets under federal law. Generally speaking, these plans are exempt from all legal process, period. They are “bullet-proof.” No creditors can reach them. You can go thru bankruptcy, lose everything else you own including your house and car, but you won’t lose your retirement plan. Congress has determined that it is more important for people to reach retirement age with their retirement benefits intact, to support them in retirement with more than just Social Security.
Before 1984, retirement plans were exempt from divorce, too. But in 1984, Congress made a special exception, allowing retirement plans to be divided between spouses in the context of a divorce or legal separation, if ordered by the divorce court in a “qualified domestic relations order,” or QDRO.
- So, what is a QDRO?
A QDRO is a separate court order that is drafted specifically for the retirement plan to be divided. The QDRO must be very complete about the how the retirement benefit is divided, and it must consistent with the terms of the retirement plan itself.
- Why must my lawyer hire a specialist to draft the QDRO?
Because it is very complicated. Every retirement plan is different. There are many different types of retirement plans – – profit sharing, 401(k), pension, defined benefit, employee stock ownership plans, deferred compensation and others. Some plans make lump sum payments, others pay just a monthly payment in retirement years. And, as stated, the QDRO must be drafted in a way that is consistent with the terms of that retirement plan. The QDRO cannot require a retirement plan to pay the former spouse more than, or sooner than, or in a form other than, the plan would otherwise pay to the participant. So drafting the QDRO takes someone who understands pension law, the type of plan being divided and the particular terms of the plan. Most divorce lawyers don’t have that level of expertise. Rather, to prepare a QDRO correctly and efficiently, it usually takes an expert who handles retirement plans and QDROs as a regular, every day part of his or her law practice.
- Might I need more than one QDRO?
Yes. Generally, a separate QDRO is required for each retirement plan being divided. So, for example, if you have a 401(k) plan and your spouse has a pension plan, and if the divorce calls for both retirement plans to be divided, then two separate QDROs will be required, one for each plan.
- So, what is the normal process for a QDRO?
First, when the divorce case is concluded, the judgment of dissolution will specify in general terms how the retirement plan is divided, e.g., “wife is entitled to 50% of husband’s 401(k) plan as of the date of the judgment. “ But this general language is not enough for the retirement plan to act on – – the plan needs a QDRO. So shortly following the judgment, the QDRO lawyer will draft the QDRO specific for that plan and send it to the plan administrator for preapproval. Most plans have a process for reviewing and approving QDROs in advance of being signed by the judge. Again, every plan is different, so some plans will require changes that other plans won’t require. Once pre-approved by the plan administrator, the QDRO lawyer will send a final copy of the QDRO to the divorce lawyer to be signed by the judge. And once signed by the judge, a court-certified copy of the QDRO is sent back to the plan administrator for final approval and implementation. Then the plan administrator will start the process of segregating the portion of the retirement plan benefit that now belongs to the former spouse.
- So how long does this all take?
The usual QDRO process, from start to finish, is three to six months, and that assumes it goes smoothly and everyone cooperates. The process involves a lot of people – – the two parties, their lawyers, the QDRO lawyer, the plan administrator, and the judge. Everyone has to do their job timely. If the process gets hung up anywhere along the way, which often happens, it can take even longer. So you can’t be in a hurry for it. If you are the former spouse and you are expecting money out of the QDRO (e.g., you are getting some of your spouse’s 401(k) plan), don’t spend the money before you receive it.
- What are the tax aspects?
Like any distribution from a retirement plan, payments to a former spouse pursuant to a QDRO are taxable when received. Any amount taken will be subject to automatic 20% federal tax withholding, to be credited against the former spouse’s final tax bill for that year. Oregon law provides for 8% withholding, but that is waivable if the former spouse would rather pay the Oregon taxes with the tax return. And there is one tax-break: the usual 10% tax penalty for early distributions (under age 59½) from a retirement plan does not apply to a distribution pursuant to a QDRO. So if the former spouse is needing the money for other reasons (e.g., to pay debts or lawyer fees or to buy a new house), taking a lump sum distribution pursuant to a QDRO will avoid the 10% penalty, even if the distribution is still subject to income tax. Or if the former spouse would rather defer all taxes, the former spouse can “rollover” any lump sum distribution tax free to an IRA where the funds can remain invested and continue to grow tax free until retirement.