When you need to transfer an interest in a qualified retirement plan, you’ll need to use a QDRO, a Qualified Domestic Relations Order (pronounced QUAD row or CUE dro). In QDRO language the person whose interest is being transferred is called the “participant” (because they’re a participant in the retirement plan). The person to whom the interest is transferred is called the “alternate payee.” It’s usually the divorcing spouse, but it could also be a child.
There are some things every QDRO by law must have:
- The names and addresses of the participant and the alternate payee.
- The identity of the plan from which the benefit is to be transferred.
- The percentage or amount of the benefit to be transferred.
- The number of months or periods of payments.
There are some things a QDRO by law must not do:
- Call for a benefit not provided for in the plan.
- Call for a benefit that exceeds the actuarial value of the participant’s interest in the plan.
- Provide for payment of a benefit that’s already been assigned to someone else.
There are some things your lawyer needs to be careful about with a QDRO:
- What happens if the participant dies before the benefit payout starts.
- What happens if the participant dies while the benefit is being paid out.
- What happens if the alternate payee dies before the benefit payout starts.
- What happens if the alternate payee dies while the benefit is being paid out.
- Does the QDRO mesh with the plan (the best way to deal with this is to read the plan document, or at least the SPD (Summary Plan Description) for the plan.
- What happens if the participant elects early retirement?
There are some things you need to be careful about too:
- Make sure a QDRO is available. Most plans provided by private employers are subject to the ERISA requirement that they honor QDROs. This is not necessarily the case, however, with many military and government plans. Make sure you find out whether marital division is available in your plan. The best way to find out (which doesn’t cost anything) is to ask the plan administrator for your plan. If the plan belongs to your spouse and not to you, you’ll probably need your spouse’s cooperation to get the information you need the easy way. The reason your spouse should cooperate is that you can always find out in discovery if your spouse makes you do it that way.
- Make sure you know what the QDRO will cost. A QDRO can be simple, straightforward, and reasonably priced if it transfers an interest in a defined contribution plan maintained by a large employer in your area. A QDRO can be fiendishly challenging (and prohibitively expensive) if it transfers an interest in a defined benefit plan. Because of the expense of QDROs, the next principle flows naturally: There’s a new issue now with the cost of QDROs – the allocated administrative fee employers are now permitted to charge for processing QDROs. Business types think this is a great idea, but it operates as a tax on those who often can least afford it, as they’re trying to pick up the pieces of their shattered lives. And because many employers are absurdly anal retentive in reviewing QDROs, this administrative fee can be quite high. Check with them employer as you and your spouse are negotiating the QDRO to make sure the administrative fee isn’t going to be a “gotcha” that upsets the economics of the deal you and your spouse are negotiating.
- Use QDROs sparingly if at all. It’s not unusual for divorcing couples to agree to “split everything down the middle, 50/50.” If you and your spouse want to agree to do that, fine, but that doesn’t mean you have to split every asset. Better to value all the major assets with an inventory and then use only one QDRO to balance the equation. Or better yet, see if you can’t use an IRA or cash to balance the equation and avoid QDROs completely.
- Think after-tax values. Remember that if you need cash now or will need cash anytime soon, retirement plans may be a lousy way to get it. That’s because you’ll have to pay income tax at your marginal rate whenever you take the money out, and if you take your own retirement plan money out before age 59 ½, you’ll have to pay an additional 10% penalty.