QDRO Process from Start to Finish
When couples divorce, they need to divide community property assets. Employer sponsored retirement plans are community property under California law and will need to be divided. Under federal law, the benefits of many types of retirement plans cannot be assigned without a court order. For these types of plans, a qualified domestic relations order (QDRO) will be necessary before a former spouse can receive benefits. Read on to learn more about the QDRO process from start to finish.
During the Divorce Process
Many retirement plans require that the plan administrator be formally added to the divorce case before it can be divided. To add the plan to the divorce proceeding, California courts require the following forms:
- Request for Joinder of Employee Benefit Plan and Order (FL-372)
- Pleading on Joinder- Employee Benefit Plan (FL-370)
- Summons (Joinder) (FL-375)
- Notice of Appearance and Response of Employee Benefit Plan (FL-374)
- Notice and Acknowledgement of Receipt, and Retirement Plan Joinder Information Sheet (FL-318 INFO)
A separate set of forms must be filed for each retirement plan being added to the proceeding. After the forms are filed, the court will issue and Order of Joinder. This court order, along with copies of the forms filed must be served on the plan administrator. The plan administrator will have 30 days to respond to the court order. Once the plan has been added to the divorce proceeding, the plan administrator will freeze the plan until he/she receives a QDRO, preventing one spouse from liquidating the account before the other can make a claim on it.
Negotiate the Division of Retirement Accounts
During the divorce negotiation, the plan will need to be divided. The couple is free to divide the plan any way they see fit, so long as it is consistent with California law. If both spouses have retirement plans that are relatively equal in value, they will likely decide to keep what is theirs and not divide the plans. One spouse may elect to take a large lump sum now and waive any future claims to retirement benefits. Many spouses elect to receive a percentage or a fixed dollar amount of the payouts once their former spouse retires. Before the spouses decide how to divide the retirement plan, they should speak with an attorney or financial planner who specializes in retirement plans. There could be adverse tax consequences to dividing the plan certain ways, and a good attorney or financial professional could save the couple thousands of dollars in taxes and penalties.
Before the divorce is final, the attorney should inform the spouse receiving benefits if a QDRO will be required to divide the retirement plan after the divorce. IRAs and state and county government sponsored retirement plans do not require a QDRO. 401(k), 403(b), 457, thrift, profit sharing, money purchase, employee stock ownership, and other business plans do require a QDRO. QDROs are only required if the couple divided the plan in a manner where one spouse receives a portion of the payouts from the plan. A spouse who elects to receive a lump sum now will not need a QDRO.
After the Divorce is Final
So, the divorce has been finalized and the judgment states “wife is entitled to 50% of husband’s 401(k).” That is not sufficient to receive payments. The wife will get nothing until the QDRO is approved by the plan administrator.
The first step in filing a QDRO is to gather the information required for a QDRO. The QDRO requires the name of the plan, the name of the plan administrator, name of the spouse, the spouse’s social security number, the spouse’s address, the date of the marriage, the date of separation, the date of judgment, the percentage or dollar amount of the payments, and the number of payments or time period for which the order applies. The next step is to draft the QDRO. A QDRO is a complicated legal document. Laws governing QDROs are complex, and a QDRO must be tailored to the specific plan being divided. A QDRO should be drafted by an attorney who specializes in QDROs, which is usually not a family law attorney.
The next step in the QDRO process is to get approval from the spouse who is the primary beneficiary of the retirement plan. This step ensures that the QDRO is consistent with divorce settlement. If he/she is uncooperative, the QDRO can be filed without his/her approval.
The next step is to send the QDRO to the plan administrator. The plan administrator will determine if the QDRO complies with federal law and the plan’s own procedures. The plan administrator can accept or reject the QDRO. If the plan administrator rejects the QDRO, usually it is to make minor changes to the language. A plan administrator will explain the rejection and a corrected QDRO can be refiled. Plan administrators typically reject 50% of the first QDROs filed.
Once the plan administrator accepts the QDRO, all parties need to sign it, and it is sent to a family court judge for approval. If a spouse is being uncooperative, his/her ex may need to get a court order to make them sign. After the judge approves the QDRO, the alternate payee will receive a certified copy of the QDRO. The alternate payee needs to send a certified copy to the plan administrator for final approval. Once the plan administrator receives the certified copy, the QDRO is usually quickly accepted.
The QDRO process takes about 3-6 months, and it is in a former spouse’s best interest to start the process as soon as possible. While there is no deadline for filing a QDRO, an alternate payee will not receive retroactive payments for a late filed QDRO, even if he/she would have been entitled to those payments had it been filed earlier. If the primary payee of the retirement plan dies before the QDRO is accepted, then the alternate payee will receive nothing, even if they would have been entitled to payments had the QDRO been filed sooner.