To divide a 401(k) plan or pension in divorce, a court order is required. In the private sector, this document is called a Qualified Domestic Relations Order, or “QDRO,” and I will use that term generically in this article. However, federal plans require a “Court Order Acceptable for Processing” and military retirement pay requires a “Military Pension Division Order.” Getting the name right is only the start.
Understanding the differences in these plans and getting the division language right (or wrong) can mean thousands of dollars in favor of one party or the other.
The biggest error made when there needs to be a QDRO is not getting the plan documents and understanding the terms of the plan with regard to survivor benefits, COLAs, early retirement and also improperly valuing the marital portion of the benefit or the portion of the benefit earned prior to marriage (which is not divisible in divorce).
These errors have less to do with the physical preparation of the QDRO than they have to do with correctly and thoroughly writing up the terms of the retirement plan division in the settlement agreement, so they can then be written up in the QDRO. A QDRO preparer cannot write in terms after the fact that were not specified in the settlement agreement.
Once the division of retirement benefits is settled in the divorce process, the settlement agreement is generally sent to a QDRO preparer. There are QDRO preparation companies who specialize in preparing these documents, and an advantage of using them is their low cost. Generally, they will charge around $500.
A disadvantage of using them is that sometimes the terms of the division are more complex than their forms allow. Some attorneys will prepare QDROs for their clients, but their fees can be high, sometimes up to several thousand dollars. Many plan administrators provide an online form that can be used.
The document generated will have a tracking number letting the plan administrator know that the QDRO was generated using their form. It is important to find out during divorce settlement negotiations whether the plan administrator provides a form that they either require to be used or they offer for use. Using the form in most cases makes the process simple and less expensive and can help avoid errors.
Plan administrators can charge a substantial fee to review a QDRO when the document is not created using their form (or if they don’t provide a form) or when there are changes to their form (other than filling in the blanks or checking the boxes).
Some plan administrators charge for reviewing a QDRO even if their form is used, so that needs to be researched during settlement negotiations as well. As an example, I have had clients in the past whose employer 401(k) plan was administered by Fidelity Investments.
Fidelity has created the Fidelity QDRO Center website which provides model QDROs for its clients’ 401(k) type plans. At the time I worked with these clients, for one 401(k) plan, Fidelity was charging from $300 to $1800 to review a QDRO, depending on whether their form was used.
After the QDRO is prepared, usually it is sent to the plan administrator for pre-approval before it is submitted to the Family Law Court Judge. They check to see that the terms don’t conflict with plan documents, and that the language is clear.
Some plan administrators, like the government’s Office of Personnel Management, will not review a QDRO that isn’t already signed by a judge. If the QDRO is not right, the QDRO must be corrected and re-submitted to the judge. As you can imagine, that gets expensive, so it’s important to get the QDRO and settlement terms prepared by someone who knows what they are doing.
If the plan administrator will review and pre-approve QDROs, once that is done, the QDRO is submitted to the judge for entry. In most cases, the judge will approve the QDRO.
You have probably gathered by now that splitting employer retirement benefits adds cost, sometimes substantial cost, to the already high cost of divorce. It’s important to discuss these additional costs in settlement negotiations and set out in the settlement agreement:
- who will be responsible for preparing the order,
- who will pay for the preparation of the order and the review by the plan administrator, and
- who will be responsible for submitting the order to the court and finally, again, to the plan administrator.
Once your divorce is final, it’s time to submit the QDRO to the plan administrator. Once the plan administrator receives the QDRO that has been signed by the judge and they give it the final rubber stamp of approval, the plan administrator can then distribute the plan funds to the non-plan participant spouse.
Generally, with pensions, how it will be paid out is spelled out in the QDRO. With a 401(k) plan, the non-plan participant spouse can choose to take their portion of the account balance either in cash, or as a rollover to an IRA or another 401(k) plan, or a combination of the two.
As you have read, dividing retirement plan benefits is complex. It involves many steps, it requires an understanding of retirement plan language and rules, and it requires financial expertise, time and attention during the settlement process.
That is where the expertise of a Certified Divorce Financial Analyst comes in. Involving a CDFA during both the settlement negotiations and the QDRO preparation process can help ensure the intent of the settlement is carried out in the documents.
Are you looking toward a gray divorce? Have you thought about how retirement benefits will be split? What questions might you have about QDRO’s?
