What’s a QDRO in a Divorce?
QDRO is an acronym for Qualified Domestic Relations Order. A Qualified Domestic Relations Order is a specific, very detailed order entered in a divorce case for purposes of dividing up a retirement plan. Retirement plans obtained during the marriage, or which have increased in value during the marriage, are generally considered marital property under C.R.S. 14-10-113 and are subject to division. Qualified Domestic Relations Orders are not required for the division of every type of retirement plan but are necessary for most. QDRO’s will be needed when splitting up a 401K plan or a pension (defined benefit plan). QDRO’s are generally not needed for purposes of dividing up an Individual Retirement Account (IRA). IRA’s are generally divided in a divorce via a transfer of funds from the primary account to another account set up for the recipient.
Why is the Purpose of a QDRO?
The primary reason QDRO’s are necessary ties into tax implications and Internal Revenue Code. Pursuant to 26 U.S.C. Section 1041, a transfer of property incident to a divorce is not a taxable event. Conversely, when funds are taken out of a retirement account, which were generally put in pre-tax, there is going to be a tax consequence. There will also generally be a penalty, unless the plan holder is over 59 years of age. In a divorce setting, if a retirement account is being divided, it is not as easy as the plan participant just pulling out the funds and giving them to the other spouse. Again, this would bring both tax and penalty consequences for the plan participant only. To deal with transfers of retirement funds in a divorce, IRS code has been adapted to allow for divisions of pensions, 401K’s, etc. via the QDRO.
Generally, a decree of dissolution of marriage must enter prior to retirement funds being transferred. Additionally, there will need to be specific, detailed orders regarding dividing retirement funds, the need for a QDRO, and how the QDRO process will be carried out. Logistical specifics tied into the actual preparation of the QDRO should include who the parties have elected to draft the document, who will pay for the cost of preparing the QDRO, and the time frames each party will have to cooperate with providing necessary information. If an agreement cannot be reached on these particulars prior to the divorce being final, the court will need to decide. Oftentimes, people without the assistance of a Denver divorce lawyer fail to include necessary specifics tied into their QDRO’s. It should be noted that the vast majority of Colorado family law attorneys do not actually prepare QDRO’s due to the very technical nature of them. As such, most attorneys refer their clients to a small handful of people expert in the QDRO drafting field. The cost of a QDRO is generally in the $500 to $700 range and it is normal for parties to split the cost equally.
How Can a 401K Be Divided?
Aside from the logistics of preparing the QDRO, content matters, too. For defined benefit plans (pensions), plans are normally going to be divided under the “time rule formula,” which basically separates the marital portion of a pension from the non-marital and allocates proceeds to the parties accordingly when the recipient starts receiving monthly funds. As with other marital property in a divorce, the marital portion of pension funds is generally divided equally. Defined contribution plans, such as a 401K, will have a cognizable present value. Unlike a pension plan, which comes with monthly payments that may not be due for years down the road, a 401K, similar to a bank account, is readily divisible. When dividing a 401K, detail matters. In some cases a specific dollar amount may be agreed upon. In others, a percentage will be ordered. Making sure you have the right strategy for account division can have a significant financial impact down the road.
It should also be noted that some plans, particularly those for public sector employees, can come with a further layer of intricacies and regulations. For example, when dealing with a military retirement plan, parties will need to utilize a specific “Military Dividing Order” and will need to make sure their paperwork is completed and submitted to DFAS in a fairly rapid fashion. Likewise, many public sector employees in Colorado have PERA (Public Employee Retirement Account) plans. QDRO’s can only be used to divide a PERA account if the parties have agreed to such in their divorce documents and they must be submitted to PERA within 90 days of the divorce decree.