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THE QDRO PROCESS | WHAT WE PROVIDE | FAQ ABOUT QDROs
FREQUENTLY
ASKED QUESTIONS ABOUT QDROs.
What am I entitled to receive
from my spouse’s retirement?
Why do I need a QDRO?
Why do I need QDRO Experts
when there are Sample QDROs available?
When should the QDRO be drafted?
Who
should pay for the QDRO?
What has to happen with
the QDRO
for me to get my share?
How long should the QDRO process
take?
Can I spend the money or do I have
to wait
until retirement to get it?
Do I need a QDRO for an IRA?
What
am I entitled to receive from my spouse’s retirement?
You are entitled to receive 50% of the vested and non-vested benefits
that were credited or accrued during the marriage. However, if you
elect to transfer your portion before the participant is fully vested,
then you would receive only the vested portion. Your portion should
not be reduced by participant loans unless the loan proceeds were
expended during the marriage. You should receive a share of the
earnings, but if earnings are not allocated (under certain types
of plans), you should receive a smaller percentage (calculated by
a fractional formula) of the spouse’s future (presumably increased)
benefits in order that you receive an increase on your portion for
inflation. In addition, you are entitled to have protection from
loss in the event of the participant’s death by being a named
beneficiary. However, if the plan requires that benefits revert
to the participant upon his/her death, your portion should be converted
to a survivor annuity unless the plan does not permit you to receive
a survivor annuity. In which case, you should be entitled to be
named as irrevocable beneficiary of additional life insurance on
the participant. These entitlements must be properly worded in your
marital settlement agreement and/or final judgment in order to ensure
that a Qualified Domestic Relations Order (“QDRO”) can
facilitate the enforcement of the awards.
Why
do I need a QDRO?
The reason you must have a QDRO to access your share of the marital
retirement assets is due to the fact that the Internal Revenue Service
granted tax benefits to the employee or employer who contributed
the benefit proceeds. For this reason, the Internal Revenue Code
does not permit anyone, not even the judge in your divorce, to divide
or transfer these assets unless and until the parties obtain a QDRO
which complies with the Internal Revenue Code.
Why
do I need QDRO Experts when there are Sample QDROs available?
Sample QDROs typically contain only the basic statutory provisions
required by the IRS. Plan administrators freely provide sample QDROs
free of charge because they are simple to administer and usually
contain language which indemnifies them from liability. The best
way to describe the difference between most Sample QDROs versus
a comprehensive QDRO is to say that Sample QDROs contain, on average,
12 provisions for accomplishing the transfer of benefits from one
spouse to the other. QDROs prepared by Legal Dynamics contain
a minimum of 40-45 provisions with detailed instructions for ensuring
that you are both favored and protected from contingencies which
could diminish, delay or deplete your share of the marital retirement
assets.
When
should the QDRO be drafted?
The best timing for starting the QDRO process is at the same time
as the filing of a petition for divorce. This helps to prevent one
party taking distributions and/or loans which could diminish the
other party’s share. In addition, benefits, especially death
benefits, can be lost if you wait until after the divorce is final.
Many attorneys have historically waited to have QDROs filed with
the Court after the divorce. However, more and more employers are
refusing to honor death protection for the spouse unless the protection
was specifically awarded to the spouse in the divorce decree.
Who
should pay for the QDRO?
If you are the spouse of the participant, it is advisable that you
be the engaging party with Legal Dynamics for drafting your
QDRO(s). If the parties agree to share the expense equally, we recommend
that you pay for our services and have the participant reimburse
you for their half. The reason for this is that Legal Dynamics, as your QDRO experts, will have the obligation to consider
the best interest of the party that pays our fee. It is important
to note that QDROs can be significantly skewed to the favor and
benefit of either party.
What
has to happen with the QDRO for me to get my share?
The Court has to sign the order and a Court certified copy has to be submitted to the plan administrator for processing. Plan administrators have historically offered review and pre-approval of unsigned benefit transfer orders because it gives them an opportunity to request modifications which protect them and/or alleviate their liability. However, it is important to note that they can reduce your benefits to cover their costs for reviewing the orders. Also, when you give them an advance "say" in the process, it often results in them taking liberties to request changes which are not required by law and are rarely in the client's best interest. In fact, under federal law, if they were to receive a court certified copy of the same benefit transfer order already signed by a judge, the plan administrator would have an obligation to begin the process of administering the transfer in 80% of the cases. In 20% of the cases, certain plan provisions may conflict with the order and have to then be amended.
How
long should the QDRO process take?
Our turn around time is 10 business days to provide the court documents. However, we are then at the mercy of both parties (who must be given an opportunity to review the documents), the judge and the plan administrator. Most of these individuals take an average of 2-4 weeks to respond, but some plan administrators take several weeks or months.
Can
I spend the money or do I have to wait until retirement to get it?
That depends entirely on the plan. Most 401(k) and other defined
contribution type plans permit the Alternate Payee to make an election
to take distribution within a short period of time following the
submission of a court certified QDRO. In that event, any amounts
distributed to the spouse would be subject to ordinary income tax,
but the 10% excise tax would be waived. The participant’s
retirement money does not become distributable via the QDRO process.
Defined benefit type pension plans usually require that both parties’
benefits stay in the plan until the participant reaches the earliest
retirement date, but some employers of these types of plans permit
earlier distribution pursuant to QDROs. The plan administrator is
the best source for more information about the timing of distribution
options.
Do
I need a QDRO for an IRA?
The answer is no, but we continue to recommend that a QDRO be entered
for IRA transfers. It is true that certain changes in the law permit
divorcing parties to transfer a portion of their IRA from one spouse
to the other pursuant to a standard divorce decree or property settlement
agreement. While the law permits this, many banks, brokerage firms
and IRA custodians are ill equipped to handle the transfer properly.
The IRA custodian will gladly do the transfer, but it often creates
a taxable event for one or both parties because of the automatic
reporting systems that most banks and brokerage firms use which
notify the IRS of distributions and transfers into and out of IRA
accounts. The result is often that the participant’s social
security number is electronically reported to the IRS as having
received the transferred money and taxes and excise penalties can
be assessed for early withdrawal. The participant can use the divorce
decree to negotiate with the IRS after the fact, but this additional
paperwork and hardship can be avoided by having the transfer occur
pursuant to a QDRO. Without a QDRO, either or both parties can be
assessed taxes and penalties on money they have not even taken out
of the bank. With a QDRO on file with the Court, either or both
parties can insist that the IRA custodian amend any incorrect IRS
reports.
