One of the most frequent questions I get as a family law practitioner is, Just what the heck is a QDRO and why should I care? First of all, if you are even contemplating a legal separation let alone a divorce, this is one of the most crucial things to think about yet quizzically the one most often ignored or forgotten. Pronounced "QUAD-row," QDRO is an acronym that stands for Qualified Domestic Relations Order. Essentially, this is a fancy "legalese" way of saying a court order that provides for how a spouse's retirement benefits (if any) will be split when a couple splits up. In the not-too-distant past, almost everyone who worked full-time had a 401(k), 501(c)(3) or other comparable retirement plan associated with their employer, which was designed to encourage employees to save for retirement. With the recent precipitous downturn in the economy, that isn't always the case anymore. So it is possible this may not apply to you at all. If so, you can stop reading now.
If me and/or my spouse has a 401(k), 403(b) or other employee-sponsored defined-contribution or defined-benefit retirement plan, what do I do now?
If either you or your spouse or both of you have any kind of retirement benefits whatsoever that were acquired during the marriage and before one of you filed for divorce, each of you will have a community interest in that money. The idea, at least in states like Arizona where I practice that have a community-property paradigm for married couples' assets and debts, both spouses have contributed directly or indirectly to the success of the marital household and thus share an undivided, equal 100 interest in retirement funds. When one of you files for divorce, each of you has a right to 50 percent of those funds, at least the dollars contributed during the marriage. This is calculated by determining the portion of the funds contributed/earned during the intact marriage--that is, the time period from the wedding date to the date that someone filed for divorce/legal separation or physically separated, whatever the parties agree to or the judge orders)--versus the total contribution period.
Huh? I still don't understand how this QDRO thing works.
Say husband started working at XYZ Products in March 1998. He and wife wed on December 25, 1998. They physically separated January 1, 2011, and husband filed for divorce the first business day thereafter (January 3, 2011). The period of contribution/earnings from March 1998 to December 24, 1998, is not going to be included in the pot of money that wife can claim an interest in. Likewise, any moneys contributed or earned (or, in the present investment market, more likely lost) from January 2011 on would not be included. Only the portion from December 25, 1998, to, say, December 31, 2011, would be at issue. Let's say instead he didn't start working at XYZ Products and enjoying the right to participate in the employer's offered retirement benefits plan until March 31, 1999. Then the period from December 25, 1998, to March 30, 1999, obviously would be excluded from the calculations.
So how much money are we talking about?
Sometimes plan administrators (either the human resources/personnel department or an independent company providing retirement benefit services for a variety of employers) will be able to come up with a definite dollar amount, which is really just an estimate approximating the value of the fund during the time period at issue. The "actual contribution method" looks at actual dollar contributions thus far (how much money is in the account?), which works best where the employee spouse's employment/ contributions began after the marriage began. The "time allocation method" is more frequently used, and is calculated this way: The number of months in which the employee spouse contributed toward the pension divided by the total number of months worked toward earning the pension; multiplied times the total value of the benefits to be paid out; divided in half, to arrive at the share the non-employee spouse would get.
When does the QDRO money get paid out?
Contrary to popular belief, the non-employee spouse (the one who does not work for the company or agency offering the retirement plan) typically does not get the money at the time of the divorce. In fact, they may not see the money for decades and, in any event, not any time before the employee spouse does. When the employee spouse first can begin receiving payouts--usually at age 65, but it varies by plan--is when the non-employee spouse will begin receiving their allotted portion. (Arizona requires payout by first retirement date.) Both will be paid out at the same rate, such as monthly, in the respective amounts or percentages specified by the QDRO.
Is there any way that I can get the money now rather than having to wait until my (ex) spouse retires?
When future earnings of the employee spouse are uncertain due to health concerns or there are many decades before retirement, a retirement payout now may be a possibility instead of an unspecified payout in the future (at the normal time of retirement). The parties must agree or the court must order a retirement payout at the time of the divorce, and it is usually accomplished with some kind of offset from other community-property assets owned by the couple. This is a nice way to truly divorce yourself of any further entanglement with your spouse--especially if you don't have any kids together--but it also requires the parties to have enough other money sitting around to pay off the non-employee spouse now, which is rarely the case these days. It is calculated using the "present cash value/lump sum method": length of time worked during marriage i? total length of time worked i-- present cash value of pension i-- 1/2 = share the non-employee spouse gets.
What if my spouse has a 401(k) but they have borrowed against it?
An issue coming up with increasing frequency due to the economic "depression" or whatever you want to call the financial funk we're in right now is that of loans against one's retirement benefits. Any amounts that have been taken out early from a 401(k) or other employer-sponsored retirement plan because of some kind of "emergency" situation--medical, economic or what have you, as defined by the plan--and that are to be paid back, often with interest and/or other early-withdrawal fees as well as possibly tax consequences, generally are not the responsibility of the non-employee spouse at the time of the divorce. Therefore, they are not to be taken into consideration in determining the value of the retirement benefit or the non-employee spouse's share of it, unless there is a showing proving to the family court judge that the non-employee spouse somehow caused or contributed to the money being taken out early and/or not being paid back in a timely manner.
Some final notes
Also, the non-employee spouse's ability to take their rightful share of the employee spouse's retirement plan does not depend on whether it was/is a plan in which the employer and/or employee pays all or part of the money that goes into it. Moreover, QDROs are not limited to employer-sponsored plans; a spouse can have an IRA (Individual Retirement Account), which generally is managed by a brokerage firm or investment bank, and the other spouse still has a right to an equitable share of it whether they are listed on the account as beneficiary or not (unless they have validly waived that interest in a signed writing). One final word to the wise: Make sure your divorce decree addresses all retirement funds and all QDROs are executed by the time the divorce is final. Do not wait until retirement looms to try to address this. You may or may not be awarded any retirement funds, and it is simply a recipe for heartache, frustration and a considerable additional outlay of attorney's fees.
This legal guide should not be construed as formal legal advice or the formation of a lawyer/client relationship.
Additional resources provided by the author
Section 414(p)(1) of the Internal Revenue Code of 1986
Section 206(d)(3)(B) of the Employee Retirement Income Security Act of 1974(“ERISA”)
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