I. What is a Qualified Domestic Relations Order (QDRO)?
A QDRO (pronounced as “qua-dro”) is a type of domestic relations order usually issued in divorce cases. During a divorce or legal separation, a QDRO splits a retirement or pension plan by recognizing joint martial ownership interest in the plan, especially each spouse's individual interest in his or her share of the assets. A domestic relations order is any judgment or order (including approval of a property settlement agreement) which (1) relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent, and (2) is made pursuant to a State domestic relations law.
The QDRO awards part of the employee's pension/retirement plan to someone called an alternative payee. A QDRO creates or recognizes an alternate payee's right to receive all or a portion of the benefits payable with respect to a participant under a qualified Plan (i.e. employer sponsored).
What Are Some Common Mistakes in Drafting QDROs?
1. Many employer QDROs fail to include language that is necessary to make the document fully effective. Some are merely recitations of language that fits some, but not all, QDROs. The qualified domestic relations order may even lack some standard language and important clauses. Corporate QDROs are usually just to benefit the company by providing a bare-bones document that the company can approve without the need to spend the company's money on an in-depth and thorough approval process.
2. A common (and usually very costly) error we see is when people (including some attorneys who are not QDRO-experienced) make the mistake of using a model QDRO from another jurisdiction. If you do this, bad things can happen, including:
- You give up way too much: awarding the alternate payee far more benefits than he/she would legally be entitled to
- Bad formatting: many individuals who draft their own QDROs are not able to format the QDRO correctly to be accepted by the court that handled their divorce
Be sure to state in your agreement which spouse will draft the QDRO!
3. Don't wait until you retire or until your former spouse dies! People lose very valuable QDRO rights all the time. Sometimes just a short delay in creating a QDRO can cause forfeiture of all the benefits awarded in the divorce. The following is a list of events that can occur before a QDRO is finalized that can cause you to lose financial benefits:
- quitting or getting fired
- withdrawal of funds from the Plan prior to retirement
- obtaining a loan secured by the Plan account
4. For a QDRO to be enforceable, each plan and assignment of benefit rights must be clearly specified. One way to avoid a drawn-out process from QDRO drafts being denied is to detail every plan's type, the specific plan name, and the clear date of division. A well-drafted QDRO can be utilized to assign rights to retirement benefits under more than one retirement plan and can include one or more plans created by the same or different employers. Since this process can get complicated, bring all documents regarding all retirement plans to your QDRO meeting with an attorney.
5. QDRO funds are paid by the plan administrator to the ex-spouse. The payment to the spouse would be taxable income to the ex (the person receiving the payment). We recommend that the participant should not forward the payment to the alternate payee directly because the party receiving the payment is responsible for paying the income taxes on the payment and we don't want to run afoul of the IRS. If the plan administrator does not correct the misdirected payment, then the participant will actually owe taxes on the payment intended for the alternate payee.