In a retirement plan, the person that contributes or is enrolled in the plan is called the plan participant. An alternate payee is someone other than the plan participant that can receive disbursements from the retirement account. In a divorce, the alternate payee is typically the ex-spouse. There are accounts that cannot be split using a QDRO: Federal Government, Railroad, and Military retirement plans. These plans are capable of being split, however, there are different rules and guidelines to follow. Even if the retirement account is a pension or 401(k), there are several details to take into consideration and technicalities to follow, so consult a lawyer that knows how to draft a QDRO.
Defined Benefit Plan vs. Defined Contribution Plan
Since there are different types of retirement accounts, they require different QDROs. Mainly because the differences in the two different types of accounts make it virtually impossible to take care of everything in one order, without creating mass amounts of confusion. The two retirement account categories are: defined benefit plans (i.e., pension plans) and defined contribution plans (i.e., 401(k)). Both types of accounts are split using a formula. The formula used to split a 401(k) account is very different from the formula used to split a pension account.
The Plan Administrator and Model Language
Before drafting the QDRO, you should contact the plan administrator to see if there is any model language that should be used. If there is, ask the plan administrator to send you a copy of this language. If there is model language, there are a few things that could come up: the plan administrator expects you to follow the language exactly; there could be fees for not using the model language; and the language could highly favor the plan over the plan participant. If the model language puts the plan participant at a disadvantage, it may be worth paying any fine or fee to use different language that would be more beneficial to the plan participant. Typically the fee is a pittance compared to the amount of retirement funds that could be lost--for example, a $300 fine versus a $3500 loss of retirement funds. Each situation is different, so make sure to weigh the possible outcomes.
Effect of the Divorce Decree
Whatever is written in the divorce decree will determine how the QDRO will need to be written. It should state how the retirement accounts are supposed to be split: this can include the percentage each party should get, the reference dates to use, which accounts the decree applies to, and etc. The more detailed the divorce decree, the easier it is to draft the QDRO. However, even vague decrees need to be followed as best as possible. The decree can split the retirement in many different ways depending on what the court determines is equitable or the parties agree to. If the divorce decree only states that the retirement will be split 50/50 as of the date of the divorce, then the ex-spouse will only be entitled to half of the amount in the retirement account on the divorce date (or other date referenced in the decree). If there are two accounts, such as a 401(k) and a pension, then the ex-spouse will get 50% of both. The plan administrator will know how much that amount should be.
An Example of a 50/50 Split
Ben started working at ABC Company on March 4, 1962. The company offered a pension plan and the opportunity to contribute to a 401(k). Ben started participating in both retirement plans. Ben married Alice on April 21, 1967. Ben continued to work at ABC Company throughout their marriage. Ben and Alice got divorced on September 13, 1999. The divorce decree stated that Alice would get 50% of Ben's retirement as of the date of the divorce. Ben retired from ABC Company on February 12, 2012. For both the 401(k) and the pension, Alice would only get 50% of Ben's retirement accounts through September 13, 1999. Ben would get the entire amount in the retirement accounts starting September 14, 1999.
Send a Draft to the Plan Administrator
Before a QDRO is signed by the court, it is a DRO--a domestic relations order. Whether or not the plan administrator has model language, send a draft of your DRO to the plan administrator, to see if it would be approved. If it would not, oftentimes the plan administrator will tell you what sections need to be fixed. Once the plan administrator "pre-approves" the draft, you need to send a copy to the ex-spouse or their attorney for approval. Their approval is shown by their signature on the proposed order. Once you have their approval, file a copy with the court. If the court accepts the order, a judge will sign it--this makes the order qualified. The QDRO can then be sent to the plan administrator for implementation. If the court does not accept the order, the judge will often provide a statement as to why. Until the issue is resolved the DRO will not become a QDRO. The plan administrator will not accept anything less than a QDRO to split retirement accounts.
When to Draft a QDRO
Ideally, a QDRO is drafted at the same time as the divorce decree. If not, it can be done later, preferably before the benefits are eligible for disbursement. If the QDRO is drafted before the plan participant retires, the entire process is much simpler, with each party typically getting what they are entitled to by the divorce decree. A QDRO can be made after retirement, however, there are some possible consequences.
A 401(k) QDRO After Retirement
Hopefully the funds have not already been disbursed. If they have, then there is nothing in the account for the plan administrator to disburse. The ex-spouse can ask the plan participant to pay the share owed or even sue for the portion. Most likely, the money is gone and the ex-spouse is out of luck. If the funds have not been disbursed yet, there is no problem. Once the plan administrator receives the proposed DRO, the account will be flagged, usually for 18 months or until a QDRO is received, whichever comes first. This will remind the plan administrator that there is a QDRO in process and to not disburse the funds until the flag is removed. When the QDRO is received, the plan administrator can implement the order and disburse the funds to both the plan participant and ex-spouse, if applicable.
A Pension QDRO After Retirement
Any previous distributions will be unrecoverable by the ex-spouse. A proposed DRO still needs to be sent to the plan administrator, so that the future distributions are not lost as well. This will put the plan administrator on notice that there is a QDRO in process for that specific account. This will flag the account. Once the plan administrator receives the QDRO, the distributions can be set for the ex-spouse and plan participant, however applicable.
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