If there is no QDRO on file when the Participant spouse retires, the non-employee spouse will get nothing and may not be able to recover her share retroactively. At a minimum, it will be a costly fight if the non-employee spouse must go to court to enforce a retroactive pension claim. Also, the Participant may be required to elect a specific option at retirement with a death benefit for the non-employee spouse. However, if there is no QDRO on file, the plan administrator will not be aware of this requirement, and the Participant may elect a different option without a survivor option, or even put his new spouse as the surviving "spouse." This can be a disaster -- it may not be possible to reverse the wrong designation, leaving the non-employee spouse penniless if her former spouse dies first. Of course, this can be avoided if the proper QDRO is on file with the plan administrator well in advance of the Participant reaching retirement age.
The Participant May Die Prior to Retirement
Even if the Participant is not close to retirement age, the non-employee spouse risks losing a pre-retirement death benefit if the QDRO is not on file at the time of the Participant's death.
The Participant May Take a Loan
Many plans allow Participants to borrow against their benefits. In this case, it is best to have a QDRO in the employee file that forbids any borrowing that might effect the non-employee spouse's interest, until it can be paid out.
The Parties May Relocate
The party who applies to the Court for a QDRO is required to provide notice to the other party. If many years have passed, and the party applying for the QDRO is unable to locate his former spouse, it may delay the process.
The Participant May Withdraw Funds
If the Participant has liquidated a 401k or other deferred compensation account prior to the entry of a QDRO, the QDRO is meaningless. The other spouse would then be limited to further litigation to obtain a money judgment equal to the amount lost, but this is costly and uncertain litigation. If the Participant has already spent the money and does not have other non-exempt assets, there may be no remedy.
The Participant May Roll Over Funds to Another Account or the Plan May Change Recordkeepers
Even if the account is not liquidated but is simply moved to another financial institution, this can cause huge problems and delays. First, this transfer (or rollover) may not be discovered until after the non-employee spouse gets a QDRO for the first account, which no longer contains the funds. The QDRO would not suffice for the new account, so a new QDRO would be needed. Second, most non-employee shares in retirement accounts include interest and dividends from the date of the original divorce settlement agreement (or from the date of the original judgment of divorce). If the funds have been transferred to a new financial institution, the new financial institution will often not possess the records from the old 401k that are needed to add interest and dividends from the date of the original agreement. In that case, attorneys (or their paralegals) must review years of account statements (assuming the statements can be obtained) to manually calculate the gains (and possibly loss
Records Necessary to Prove a Separate Property Credit May No Longer Exist
If the Participant spouse had funds in a deferred compensation account at the time of the marriage, those funds are her separate property, and the non-employee should not share in those funds. However, it is the burden of the Participant to prove the amount of the pre-marital funds. Most financial institutions maintain account records for a limited period of time, often seven years. If the account records from the date of marriage are no longer available when the QDRO is being prepared, the Participant may have to forfeit a portion of her separate property to the other party.
It Takes Time for the QDRO to be Signed by a Judge
Even under the best scenario, where the other party has no objections, there can be considerable time between the date that the proposed QDRO is submitted to the Court, and the time that it is signed by a judge. For example, in Suffolk County, New York (where my office is located), this process can take up to six months.
The QDRO May Need to be Amended
While many plan administrators will review a draft QDRO before it is signed by a judge, some will not. In those cases, the parties may not know until after the QDRO is granted by the Court and served on the plan, that it violates technical plan provisions and will not be honored (i.e. "qualified"). For example, the plan may prohibit the calculation of an award between two dates, may not allow for a pro rata survivor benefit, or may not calculate awards prior to a certain valuation date. If the QDRO contains a prohibited term, it will have to be amended and re-submitted to the Court in order for the distribution to be effectuated. While this situation is rare, additional time should be allotted for such a possibility.
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