Have you been hoping that someone would explain what a QDRO is in plain English? Read on!
QDRO
QDRO (pronounced KWA-drow or Q-drow) stands for Qualified Domestic Relation Order. While your divorce decree spells out most of the details about your life after divorce (property division, custody, etc.), the QDRO is a specialized section of the divorce decree (or even a separate document) that governs how your retirement plans should be divided.
Unlike the divorce decree, which is effective when it is signed by the judge, the QDRO must also be accepted by your retirement plan’s administrator. QDROs are governed by federal law (ERISA) and will be recognized as valid in all states, but different types of retirement plans have different rules. It’s important to get the QDRO right so that you don’t forfeit your benefits later on. Make sure you work with an experienced family law attorney who knows how to handle complex financial matters.
What retirement plans do QDROs apply to?
The “Q” in QDRO stands for qualified—so QDROs apply only to qualified retirement plans. A QDRO is needed for 401(k), 403(b), and 457 plans, employee stock ownership plans, company pension plans, as well as several other types of less common plans.
IRAs and military pensions are not considered qualified plans. If you or your spouse served in the military, you need a Military Pension Division Order (MPDO) instead. If you have an IRA, you just need language in the divorce decree that states that the division is a “transfer incident to divorce” so that neither spouse is penalized for the transfer.
How will the funds be divided?
In California, any income you earn during the marriage is considered community property, including retirement savings and interest. Community property is typically divided in half, but there may be other reasons for dividing property in another way.
You can negotiate with your spouse about how split your retirement assets fairly. Although the tax penalties can be high, sometimes a spouse will prefer to get a lump sum payout, rather than receive payments in the future. Or the spouse with the retirement plan may choose to buy out the other spouse, either in cash or by forfeiting the right to other assets. These approaches can have serious disadvantages, so ask questions and think carefully before you agree to forfeit your right to receive retirement benefits in the future. To read more about your options for dividing retirement funds, click here.
How does the QDRO work?
The QDRO must state the percentage or amount of money (or a formula for determining the amount) that will be paid from the participant’s plan to the “alternate payee” (the other spouse). The order also needs to state the number of payments or the time period when the payments will be made.
Talk to your retirement fund administrator to find out if they have a policy in place that determines how you will have to split the fund with your spouse. Because different types of retirement funds are governed by different rules, you need to be sure the QDRO is specifically tailored for each plan.
Do you have more questions?
Those are just the basics about QDROs. If you have questions about QDROs and your Southern California divorce, contact Kendall & Gkikas, LLP. Call 909-482-1422 or email info@parents4children.com to set up your initial consultation today!
