WHAT'S A QDRO IN DIVORCE?
When there is a retirement plan to be divided by two spouses, such as a 401K or pension plan, a QDRO (Qualified Domestic Relations Order) must be drafted in order to tell the retirement plan what to do with the plan. This takes a lot of time and patience.
If a spouse worked and contributed her earnings to a 401K plan during the marriage, then those marital contributions are community property that is divided evenly in California. There are times when the retirement plan is not divided equally, too. For instance, if the spouse contributed to the plan before marriage and contributed to the plan during the marriage, and maybe even contributed to the plan after the couple separated, then part of the plan is her separate property and part of it is community property. There are different ways to divide this asset
HOW TO DIVIDE QDRO'S
- One way to divide a retirement plan is to calculate how much is separate and how much is community. This is called the “time rule” because the calculations are based on the time the couple was married, and the time the couple separated. Most judges typically order retirement plans to be divided based on the time rule.
- Another way to divide a retirement plan when a couple is being more creative than using the time rule calculation is to determine a lump-sum payment or a percentage of the plan that the couple thinks is fair. Sometimes this is done when one spouse is a teacher, and social security wasn’t withheld from their paychecks. Maybe they had a mandatory teacher’s pension, e.g., CalSTRS, instead of social security deductions. Some couples may think a 30/70 or 60/40 split is more fair than a 50/50 split, especially if the teacher spouse cannot claim social security benefits and the other spouse can. Of course, these considerations require information from professionals who know about retirement plans or who can look into the plans to help inform the couple so there can be hearty discussions before decisions are made.
Whether the time rule, or an agreed-upon lump sum amount, or a percentage is being used, the plan will need instructions to know how to divide the plan. The instructions come in the form of a QDRO. So the couple will need to hire a professional to draft their QDRO for them. These professionals may be attorneys or accountants who have access to tools that help draft QDROs. Some QDRO professionals will charge significantly less but will say right up front that they require many weeks to draft the QDRO and do not contact them! They will contact you when the QDRO is ready. In some cases, the retirement plans themselves might help a couple create a QDRO free of charge.
HOW LONG DO QDRO'S TAKE TO PROCESS?
No matter who helps draft and process the QDRO, it will take time. Months. Here is why. The first step is to gather information about the plan from the spouses. Often, questionnaires are used so that the preparer will know how the asset will be divided, and the preparer will also need at least one statement from the plan. Then it’s time to research the plan and begin drafting it. There are a lot of different kinds of plans and they’re often handled differently. For instance, a county plan may require joinders to be prepared and processed so that the plan is joined to the divorce. Federal, state and county plans are all different, and then there are private plans, as well.
Once the QDRO is finally drafted, it needs to go to the plan for pre-approval. This can take months. The plan may have changed some of their requirements or could have been sold to another plan. So, if some rules were used that were valid before, they may not be valid anymore and changes may need to be made to the QDRO so that it will ultimately be accepted by the plan. We say “ultimately” because it doesn’t end there.
After the plan is pre-approved, it’s time for the couple to sign the QDRO and submit it to the court so a judge can sign it. This can take months if the judge is backlogged with a pile of other orders and judgments on their desk, with trials and other hearings piled up on the docket. Once the judge signs it, the QDRO becomes an order; specifically a Qualified Domestic Relations Order. The court clerk will send it back to the preparer or the couple, depending on whether the preparer was hired to do all the processing or just part of it.
Now it’s time to send the QDRO to the plan to be implemented. If all goes well, the plan will divide the funds and each ex-spouse (we now say ex-spouse because by this time the divorce should be final) receives their agreed-upon share. There may be other tasks, such as setting up a new IRA or 401K for the person whose name wasn’t on the plan.
How to avoid the cost and delays of a QDRO? When a couple is being more creative than the standard time rule calculation, or the other options described above, they may choose a “you-keep-yours-and-I’ll-keep-mine” approach, or they may want to offset or trade the retirement plan for another asset, like a house, bank account, or some other asset. Of course, tax consequences have to be considered when discussing such an offset. But… if a spouse is going to keep 100% of a retirement plan that is in their name alone, then no QDRO is needed for that plan.
Some couples have multiple QDROs, and others may only have one. Nevertheless, the most important thing to remember when a QDRO is needed is that couples must be patient. It’s going to be a few months.