Common QDRO Mistakes

QDROs: Mistakes in Splitting Retirement Funds

A Qualified Domestic Relations Order (QDRO) is the primary way to transfer ownership of most retirement funds to a divorcing spouse. Once you understand that federal law dictates this process, which is administered through your state’s divorce regulations, you should consider some key points as to by whom and how your QDRO will be prepared.

I previously discussed the benefits of using a law firm that specializes in QDROs, to save time and money in effecting the transfer. But I’d like to talk here about the setup for your QDRO: your Property Settlement Agreement (PSA).

A PSA can literally be something written out and signed by both parties themselves, or a document drafted by a lawyer or lawyers that has been refined in the smallest detail. The latter is typically much more defensible in Court, should it ever become contested. Either way, though, amid the details of who gets the house, the cars, personal property and bank accounts should be language as to how retirement accounts and benefits should be split and who is responsible for splitting them.

Many spouses think their job is done once they decide Spouse A will get X percentage of Spouse B’s 401(k) or pension benefits. But if you don’t specify who is responsible for paying for, drafting and getting the QDRO, it may languish undone. If enough years pass, a spouse may forget about the division and end up with far less than he/she negotiated. (IRAs do not require a QDRO to remove funds due to a divorce).

Consider it a good housekeeping detail. Your PSA should list all retirement accounts and benefits in explicit detail, including statement balances as of relevant dates, as well as the exact amount to be transferred. It should then list which party is responsible for making this happen. If one of the parties’ lawyers, or a third party QDRO specialist has been chosen, this ought to be spelled out in the contract. Most importantly, the PSA should specify who will pay for the drafting of the QDRO (it is common to split the cost, or one spouse may pick up the tab). Ideally, there should be deadlines, but it is almost impossible because it depends upon the Plan Administrator. Lawyers have no control over him/her.

Pension benefits can be split just like contributory plans like 401(k) s or IRAs, but the calculation is more complicated.

None of this should be an excuse to be vague. After the long, sometimes difficult process of negotiating a divorce settlement, the last thing you want is to lose what you’ve already gained.

Contact me if you’d like to discuss a Property Settlement Agreement and the division of retirement benefits.