Dividing Retirement Plan Assets in a Divorce

How a Qualified Domestic Relations Order (QDRO) Can Protect Your Rights

Even while you’re going through the difficulty of a divorce, you need to make informed financial decisions regarding the division of the property that you and your spouse have accumulated during your marriage. Retirement savings are one of the largest assets many people own, and therefore are an important issue in divorce proceedings.

If you’re planning to get a separation or divorce and your spouse has an employer-sponsored retirement plan such as a 401(k) or pension plan, you’re legally entitled to part of the balance. But how do you protect your share? What’s to stop your spouse’s employer from paying out the benefits to your spouse or ex-spouse, leaving you with little or nothing?

A Qualified Domestic Relations Order (QDRO, pronounced “quad row”) can protect your interests. A QDRO is a court order, judgment, or decree related to child support, alimony, or property rights, that instructs your spouse’s pension plan on how to pay you your share of plan benefits.

QDROs only apply to plans that are IRS tax-qualified and covered by the Employee Retirement Income Security Act (ERISA). They do not apply to military or government pensions, which are governed by other laws.

A QDRO gives you protection that a marital settlement agreement does not, so don’t assume you’re covered just because your divorce decree states that you have a right to part of your spouse’s retirement funds.

A Domestic Relations Order is not considered Qualified unless it’s been approved by the retirement plan’s Plan Administrator and the court. Retirement plans often have standard QDRO forms that your lawyer can use to draft the wording of the QDRO. Sometimes these are adequate, but if your share of your spouse’s retirement account is substantial, you should consider using an attorney who specializes in QDROs to ensure that all of the related issues in your marital settlement agreement are incorporated into the QDRO and that your rights are fully protected in a way that a generic QDRO form can’t provide.

If your attorney is not experienced in QDROs it will take him or her longer to do the research and paperwork, which will cost you more in legal fees. There’s also the chance that he or she could miss something important that could end up costing you money.

Defined contribution plan assets are easier to calculate than defined benefit plan assets because defined benefit plan payments are based on complex actuarial calculations and factors such as years of employment. If your spouse has this type of plan, your lawyer will probably have to hire an actuary to calculate your share of the plan assets.

Your lawyer should read the plan’s summary plan description and other plan documents because the QDRO’s terms must agree with the terms of the plan. The issues related to defined contribution plans are different than those related to defined benefit plans, another reason it helps to use a specialist.

If your spouse is covered by a defined contribution plan, like a 401(k) plan, the timing of your payment depends on that particular plan. Some plans make an immediate lump sum pay out and others pay a lump sum in the future or make periodic payments.

If your spouse is covered by a defined benefit plan like a company pension plan, you would receive monthly payments starting at your normal retirement age.