What is a QDRO and do I need one?
QDROs are specialized court orders used to divide qualified retirement assets.
What is a QDRO and how does it work?
“QDRO” (commonly pronounced “cue-droh” or “kwah-droh”) is an acronym that stands for Qualified Domestic Relations Order.
A QDRO will allow the plan administrator to divide the participant’s rights to a plan with an “alternate payee” and will allow the alternate payee to assume ownership of his or her portion of the plan as if he or she were the participant.
This allows divorcing parties to divide a retirement account without having to incur the usual taxes and penalties that come with prematurely cashing out a retirement asset.
Is a QDRO legally needed to split up retirement assets in Wisconsin?
A QDRO is something that is required by a plan administrator, not by a court. A divorce court decides how to divide a retirement asset by determining a specific percentage of the account or dollar amount each party is to receive. A QDRO is what actually accomplishes the court’s order for division.
Retirement plans have specific rules and regulations—and a court order cannot modify those terms. Therefore, just because two parties to a divorce agree that the Wife should receive 100 percent of the Husband’s pension doesn’t mean it is possible under the terms of the plan.
This is why it is very important to consult with an attorney regarding the division of retirement assets. There are nuances to their division and sometimes plan documents can be confusing. An attorney can help you figure out whether a QDRO is needed to divide your plan or whether there are alternatives.
Because QDRO’s are typically only needed to divide qualified benefits such as pensions, 401ks, and 403(b)s, they are not necessary to divide IRAs or Roth IRAs. IRAs can be transferred pursuant to the plan details but will not require a special court order. Consult with the plan administrator for their requirements.
9 Steps in the QDRO Filing Process
The QDRO process usually happens after the divorce is finalized. The steps are generally as follows:
- 1. The court enters a judgment of divorce detailing how the qualified account is to be divided. This is typically prescribed as a percentage of the account that is to be transferred to the “alternate payee” and will include any natural investment or market gains and losses between the date of the order and the date of transfer, but will NOT include the participant’s ongoing contributions or employer contributions made on his or her behalf.
- 2. Your attorney will contact a financial consulting firm to prepare the QDRO.
- 3. Both parties will submit their one-half share of the QDRO fee. The total fee is usually $600 to $800 and is divided equally between the parties. The parties pay the financial services firm directly. The payment does not come out of the QDRO. However, on occasion, plan documents will allow the plan to charge a separate internal QDRO fee directly to the participant or the alternate payee (or both). These fees typically are deducted from the amount transferred between the parties.
- 4. The financial services firm will contact the plan administrator to determine the terms or language required by the specific plan to be divided.
- 5. The financial services firm will then draft a proposed QDRO based upon the judgment of divorce and the plan requirements and will submit the draft to the plan administrator for preliminary approval.
- 6. If the QDRO is approved, the financial services firm will send it to your lawyer for filing with the court. If it is not approved, it will go back and forth for revisions between the plan administrator and the financial services firm until it is approved.
- 7. Once it is preliminarily approved by the plan, the QDRO will be submitted to the divorce court for final approval.
- 8. The judge will sign the QDRO and will return it to your lawyer. The lawyer will then forward the final QDRO to the financial services firm and the financial services firm will submit it to the plan administrator for processing.
- 9. You will then be notified by the plan administrator of how to establish and access your new account (if you are the alternate payee) or you will be notified that your account has been successfully divided if you are the participant.
Any problems along the way will be handled by your attorney and the plan administrator in cooperation with the financial services firm and, possibly, the divorce court.
The QDRO process can take up to six months or more before the qualified plan will be officially and finally divided pursuant to the divorce judgment.
Who is responsible for filing a QDRO in a divorce?
Both parties are responsible for complying with the judgment of divorce. However, the plan participant will usually have better access to information about the plan than the alternate payee. Therefore, if parties are unrepresented by attorneys, the plan participant will usually need to take the lead in starting the QDRO process. However, the alternate payee will also need to participate and to provide information when requested. It is important that both parties cooperate so that that process is not stalled.
If one or both parties have lawyers, the lawyers will initiate and oversee the QDRO process.
Cost of Filing a QDRO Form
The cost of preparing a QDRO will vary based upon who drafts it. Generally, the cost of having the QDRO financially prepared will range from $600 to $800—a cost which will be split equally between the parties.
What if one or both spouses refuse to pay their portion of the QDRO fee?
Failure to pay the QDRO fee will result in the QDRO remaining incomplete and unfiled. This can negatively impact both parties’ rights under the plan. If one party holds up the QDRO process by refusing to pay the QDRO fee, the court can hold that party in contempt.
Can expected monies from a QDRO be received immediately?
Processing a QDRO will not result in a cash payout. Instead, it results merely in the transfer of an account interest to the alternate payee. At the end of the QDRO process, the participant will still have his or her pension (or 401k, etc.), but the value will be reduced by the share that is transferred to the alternate payee who will have his or her own pension (401k, etc.) under the same plan.
If a party wants to cash-out their interest in the plan after it is divided, they will have to do so pursuant to the plan terms and will be subject to any associated taxes or penalties.
What party pays taxes on a QDRO?
No one. The purpose of a QDRO is to avoid negative tax implications or penalties for having to divide and account incidental to a divorce. A QDRO allows for a tax-free, penalty-free transfer between the parties. But, if one party wants to cash-out his or her account after it is divided, they will be subject to the usual and customary taxes and penalties and will be subject to all limitations or restrictions imposed by the plan.
Can I file a QDRO myself?
Short answer: Probably not.
A QDRO is a court order. You have a constitutional right to represent yourself in court—this includes the right to prepare your own legal documents. However, QDROs are highly specialized and highly nuanced court orders. Even lawyers rarely draft them—instead choosing to hire qualified financial professionals who specialize in the preparation of QDROs.
So, while you technically can attempt to prepare your own QDRO, it is not recommended.
H2: Can a QDRO be reversed?
Short answer: Not really.
Because a QDRO is a court order, it is subject to enforcement or modification under the same rules as other civil court orders. But as a practical matter, once a QDRO has been approved and implemented by the plan administrator it cannot be undone.
Contact a QDRO Attorney
If you would like to speak to an attorney about how to go about dividing or cashing out retirement assets as part of your divorce settlement, contact one of our attorneys for a free consultation.