January brings that “new year, new me” energy, particularly for those moving from a “we” to a “me." It's often nicknamed “Divorce Month” due to the high number of splits that occur. After couples get through the obligations of the holidays, they’re ready to stop pretending everything is merry and bright, grieve the end of their marriage and start untangling the assets.
For couples without prenups and divorcing in one of the nine community property states, assets accrued during the marriage may be split 50/50. The remaining states use equitable distribution, which divides marital property in a way that’s deemed “fair” — which isn’t always equal. That includes retirement funds, and for some types of retirement accounts you need a Qualified Domestic Relations Order to split things.
“The reason a QDRO is necessary is that retirement accounts are in the name of one spouse. The plan administrator is not permitted to divide the account without a QDRO,” said Laurie Itkin, certified divorce financial analyst at The Options Lady.
What is a Qualified Domestic Relations Order?
A QDRO can come in the form of a judgment, decree or order, according to the Internal Revenue Service. It's "a legal instrument used in divorce proceedings to divide certain retirement plan assets between spouses,” said Melissa Murphy Pavone, certified financial planner, certified divorce financial analyst and founder at Mindful Financial Partners.
The QDRO must include the participant’s and alternate payee’s full name and address. Additionally, it must disclose the specific amount or percentage of the main participant or account holder’s retirement benefits that will be paid out to the alternate payee.
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Which retirement accounts need a QDRO?
Couples may have several different types of retirement accounts among them. But not all retirement accounts require a QDRO to split assets.
“It specifically pertains to employer-sponsored retirement plans governed by the Employee Retirement Income Security Act, such as 401(k)s and pension plans,” Pavone said.
How those retirement assets get split depends on multiple factors that are unique to your marriage and specific state laws.
“The marital portion of a retirement account is the portion of the account balance or benefits accrued during the marriage, and it’s critical to determine this amount when dividing retirement assets in a divorce. The dates of the marriage and the respective accounts play a pivotal role in this calculation,” Pavone said.
Good to know: A prenuptial or postnuptial agreement can outline which assets, accounts or debt should be treated as separate property.
Who needs a QDRO?
If you’re entitled to a portion of retirement funds as the “alternate payee” you need a QDRO to access your share. According to the Department of Labor, federal law says the retirement plan’s administrator is responsible for deciding the validity of a QDRO.
To initiate a QDRO, it’s best to work with a vetted professional. With so much on the line, you don’t want to make a mistake, as it can be challenging to rectify.
“Most QDRO preparers, some of whom are attorneys, charge between $500 and $1,000 for a QDRO and may offer a discount for two or more QDROs, as each plan requires its own QDRO,” Itkin said.
Though you can file a QDRO on your own, it’s not advisable. Given the gravity of the situation — transferring retirement funds from the participant to the alternate payee — the process can be complex and must meet certain guidelines.
You might want to scrimp and save, but this isn’t the time for that. If you’re the alternate payee in particular, you want your share of retirement assets without any major hassles. Especially if you’re flying solo and need to depend on yourself in the future.
How a QDRO works
Not all divorcing parties need to file a QDRO. But if retirement accounts are on the table as part of the divorce agreement, then you typically need to file a QDRO to facilitate that process.
“During the divorce process, the parties reach agreements on the division of retirement accounts. A QDRO would then be drafted with directions to the custodian of the account, such as Fidelity, pension administrator, etc., on how the account should be divided,” said Kristyn Carmichael, professional mediator, family attorney and certified divorce financial analyst at Couples Solutions Center.
Based on the QDRO instructions, a set percentage or amount would be transferred from the participant’s account to the alternate payee. For example, a husband (participant) could have a 401(k) that should be split, with 50% going to the wife (alternate payee), based on the divorce agreement. Through a QDRO, 50% of the husband’s 401(k) would be transferred to the wife through a retirement account in her name.
"A QDRO helps people avoid taxes and penalties when splitting accounts during a divorce, as well as moving money into each spouse's individual name"
According to the IRS, the alternate payee who receives the funds can roll over the distribution from a qualified retirement plan tax-free with a QDRO.
“A QDRO helps people avoid taxes and penalties when splitting accounts during a divorce, as well as moving money into each spouse's individual name,” Carmichael said. “If you were to try and divide a retirement account outside of a divorce, you will typically be hit with 10% penalties, if withdrawn prior to 59.5 years of age, as well as taxes, dependent on the type of account. With a QDRO during a divorce, this eliminates taxes or penalties when dividing an account.”
What to consider with a QDRO
When you’re trying to put the puzzle pieces of your life back together, getting a QDRO might be the last thing on your mind. But you don’t want to let the QDRO process drag on longer than it needs to.
“If a QDRO is not done properly and the person who owns the pension dies, the alternate payee loses it entirely. I've seen many litigants engaged in protracted litigation in probate over this without good results,” said Christina Previte, founder and managing attorney at WOLF Esquires LLC.
Even if that scenario doesn't happen you could still get embroiled in a lengthy, drawn-out QDRO process.
One such case includes celebrities Eddie Cibrian and Brandi Glanville, who went through a public split when Eddie cheated with singer LeAnn Rimes. The couple divorced relatively quickly in 2010. But for nearly four years, the former spouses were in QDRO limbo, trying to account for retirement funds and fighting about overpayments in support, according to The Bar Association of San Francisco.
Moving swiftly through the QDRO process can help you avoid potentially devastating consequences as an alternate payee. Regardless of the situation, if you’re the alternate payee it’s best to take the money and run. If you’re the participant losing part of your retirement, it can add to the pain.
But maybe that’s the price of being happy and your newfound freedom.
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