A Qualified Domestic Relations Order or QDRO is a legal tool used to divide retirement accounts. Specifically, it is a court order signed by a judge, which directs the plan administrator of the husband’s or wife’s pension or 401(k) to distribute a portion of those funds to the other spouse. The transfer is accomplished without implicating any penalty or tax payment requirement.
The legal ins-and-outs of drafting a valid QDRO can be tedious and complicated, which is why some divorce attorneys outsource the handling of QDROs to QDRO specialists. Other attorneys prefer to draft and submit QDROs on their own. Either option, of course, is fine, assuming that all the legal QDRO requirements are met. Retirement plan administrators are not allowed or required to follow the terms of any court order purporting to assign retirement benefits unless it meets the requirements of a QDRO.
Surprisingly, the most common shortcoming is a failure to clearly specify the amount or percentage of the benefit that should be paid to the alternate payee (the non-employee spouse). If it is less than clear as to the amount or percentage, it will be rejected by a plan administrator.
This problem often crops up when the participant spouse is not fully vested in his or her employee benefit plan. If the QDRO divides the participant’s interest in the plan by percentage but fails to reference the amount of the vested interest as compared to the unvested portion, the QDRO is ambiguous and will be rejected.
A similar problem will occur if the participant has taken a loan from his or her 401(k). A QDRO that is unclear as to whether the division is to be a percentage of the full vested account balance or the actual value of the investments will also be rejected.
Another common QDRO problem is an improper requirement that the plan provide any form of benefit not otherwise provided for. A simple example of this is when a plan is invested in an investment that is closed to new investors and the plan itself does not allow for in-kind distribution. The QDRO cannot require the plan administrator to do something otherwise prohibited by the plan itself.
The passage of time can also create problems with the approval of a QDRO. There is no time requirement for the submission of a QDRO following a divorce. However, a delay of any length can increase the risk of problems. If the participant takes a significant distribution from the plan prior to approval of a QDRO, tracking down and collecting the funds after the fact may be difficult or impossible.
While almost every divorce attorney has a QDRO horror story or two, trouble can be easily avoiding by communicating closely with the plan administrator throughout the QDRO process and being vigilant about the approval process following your divorce.