What happens when your qualified retirement account money goes to your ex without a QDRO?

It's treated as a taxable distribution to you. This means you owe the IRS for money that actually winds up in your ex's pocket. Your ex will love this, because it's a tax-free windfall at your expense. On top of the income tax bill, you may also get stung with the 10% premature withdrawal penalty if you are under age 59 1/2. This just adds insult to injury.

 

Who Should Prepare the QDRO?

On the surface, QDROs may seem easy to prepare, especially where the spouses are cooperating with one another. Many attorneys (and non-attorneys) try to use a “one-size-fits-all” approach to drafting QDROs, or use a plan’s model QDRO without a full appreciation of the legal and financial consequences of certain provisions. However, the rules governing QDROs and retirement plans are complex and constantly changing. There are a variety of plans and each has unique requirements and features. A QDRO must be drafted to meet specific legal criteria and tailored to the particular type of plan it’s supposed to divide. Using a generalized approach to a QDRO can result in an improper division of benefits, the loss of important rights under a plan, and a total or partial loss of benefits upon the death of the participant.

 

Although the need for a QDRO arises out of divorce, many experienced family law attorneys will readily admit that they can’t prepare QDROs and will refer clients to an attorney engaged in the QDRO subspecialty. This is similar to how the health system works. You wouldn’t ask your family doctor to treat advanced heart disease; you would see a cardiologist. The bottom line - if you need a QDRO, hire a QDRO attorney.

 

Will the QDRO Specialist Compute the Amount Payable to the Alternate Payee?

Unless the MSA or final judgment of divorce include the specific amount payable from the retirement plan to the alternate payee, the QDRO preparer will use a formula that instructs the plan administrator how to compute the amount payable. A formula has the advantage of accounting for adjustments to the benefit over time.

 

How is Payment Made to the Alternate Payee?

With plans that allow lump-sum distributions, alternate payees can elect to receive their share in one payment or rollover their share to an IRA or other eligible plan. This is typical with 401(k) and profit-sharing plans. Defined benefit plans and pensions generally pay benefits in monthly installments. With these types of plans, the alternate payee will typically receive monthly payments for a set period of time. Still other plans do not pay benefits until the plan participant has retired and is receiving his/her own benefits under the plan.

 

Is a QDRO the Only Way to Divide Retirement Plan Benefits?

No. As noted above, there are several types of retirement plans that don’t require a QDRO. Alternatively, you can avoid dealing directly with the plan by entering into a “buy-out” agreement with your spouse. In a “buy-out,” the employee spouse keeps the plan and pays the non-employee spouse the value of his or her interest in the plan. Both spouses must agree to the terms of a buy-out, and the agreement should be confirmed in the MSA and/or final judgment of divorce. If you’re considering a buy-out, you’ll need to know the current value of the plan and the marital or community portion owed to each spouse. For a defined contribution plan like a 401(k) or 403(b), you can find the current value by looking at account statements or contacting the plan administrator.

 

With a defined benefit plan or pension, a current value calculation isn’t that simple. Because these benefits are paid in the future, it’s harder to know what they’re worth today. You’ll probably have to hire a pension actuary to determine present value. You’ll also need to figure out what portion of the current value you’re entitled to. Talk to your attorney and/or QDRO expert about determining your share. They may refer you to an actuary, CPA, or financial planner who can perform this calculation for you.

 

If you’re going to keep the retirement plan, make sure you consider potential tax consequences. If you forget to account for future benefit-related taxes in your buy-out agreement, you may end up with less than what you bargained for. If you need help figuring out tax issues, consult a CPA. You should be able to use the information regarding tax liabilities to negotiate a fair buy-out amount.

 

Will a domestic relations order fail to be a QDRO solely because of the timing of issuance?

No, not if it otherwise meets the QDRO requirements under ERISA. A domestic relations order issued after the participant's death, divorce, or annuity starting date, or subsequent to an existing QDRO, will not fail to be treated as a QDRO solely because of the timing of issuance. For example, a subsequent domestic relations order between the same parties which revises an earlier QDRO does not fail to be a QDRO solely because it was issued after the first QDRO. Likewise, a subsequent domestic relations order between different parties which directs a portion of the participant's previously unallocated benefits to a second alternate payee, does not fail to be a QDRO soley because of the existence of a previous QDRO. Further, a domestic relations order requiring a portion of a participant's annuity benefit payments be paid to an alternate payee does not fail to be a QDRO solely because the domestic relations order was issued after the annuity starting date.

 

Reference: 29 C.F.R. 2530.206; see section 1001 of the Pension Protection Act of 2006, Pub. L. 109-280, 120 Stat. 780 (Aug. 17, 2006).