Understand the QDRO Process from Start to Finish
The process for obtaining a final qualified domestic relations order, or QDRO, requires the cooperation and involvement of numerous parties, and is really a set of processes that can be broken down into steps. If you are going through a divorce, or recently went through a divorce, it is important to have an understanding of the various steps in the process and their importance, and some knowledge of the obstacles that may arise along the way, so that your expectations for receiving the benefits are realistic.
Understand the QDRO Process from Start to Finish
While the general process for drafting and having a QDRO “qualified” by a retirement plan is the same whether you are in the middle of a divorce process or your divorce is final and your judgment is “in hand,” they do vary slightly, and the level of stress and expense between the two can vary quite a bit depending on your circumstances.
Important Steps in the QDRO Process
Generally speaking, the steps in the process involve:
gathering information about the retirement plans at stake;
drafting your separation agreement language (or reviewing that language if your divorce is final);
drafting the order to provide what your separation agreement provides;
obtaining the approval of both spouses or their attorneys;
obtaining the retirement plan’s preapproval of the draft order;
obtaining the judge’s signature on the order;
filing the order with the clerk;
obtaining a certified copy of the signed, filed order;
submitting the order to the retirement plan for “qualification”; and
receiving and checking the plan’s “interpretation letter” as to how they will implement the order.
Related to this last step, if the interpretation of the QDRO does not meet the parties’ intent, the plan is notified and the parties are provided with sufficient time to revise the order to meet the intent of their agreement.
Key Considerations When Selecting a QDRO Attorney
In our opinion, when it comes to dividing retirement plans in divorce, it is more important to have an attorney knowledgeable about the myriad rules applicable to retirement plans and, especially, all the ways in which they may be designed, than it is to have a hard-hitting divorce attorney. Ideally, your divorce attorney would work with an ERISA attorney that has extensive experience with QDROs early in your divorce process.
If, however, your divorce is final and you now need to obtain a QDRO to divide the retirement plans pursuant to your settlement or separation agreement, it is just as important to have an experienced QDRO attorney handle the QDRO drafting and approval process. This is because a different set of obstacles to the qualification of the “DRO” may arise if your divorce is final.
A Summary of the QDRO Process
Understand the Retirement Plans at Stake: You are Entitled to Request Detailed Information About the Plans
In a perfect world, your QDRO (or divorce) attorney would gather information from your soon-to-be ex-spouse (or his or her attorney) about every past employer that offered retirement benefits. The QDRO attorney would do a bit of research to determine the types of plans that each employer offered, locate the plan administrator for each plan, and make a written request for the plan document or summary plan description (SPD), an account statement, and the plan’s written QDRO guidelines (Retirement Plan Participant Notices - Domestic Relations Orders That Affect Benefits).
Under ERISA, the plan administrator must provide this requested information to the alternate payee or his or her attorney if a written request is made. Very often, however, plan administrators wrongly believe that they cannot release this information without the retirement plan participant’s authorization.
If your divorce is final, this is one area where a knowledgeable ERISA attorney is critical to you, because we can make effective legal arguments that the plan administrator provide this information, as well as seek assistance (if needed) from the appropriate federal agency [EBSA].
Why is it so important to gather this information? For one thing, you should be certain that there is not a pension benefit from a prior employer that would be marital.
If your spouse, for example, spent seven years working for Lockheed Martin early in your marriage and then moved on to another job, he or she may be entitled to a Lockheed pension benefit of some amount when they reach retirement age. Pensions often go undetected in this type of situation because they are not benefits that show in an “account” or that may be “rolled over” when the employee changes jobs.
A spouse may forget or not realize she or he has a pension as a result of the way a pension is earned. After several years of work, pensions become “vested” (the participant is “entitled” to the benefit), but the benefit isn’t available or even calculated until the participant reaches retirement age under the plan. Credit accrued under a pension cannot be “taken with you” or transferred to another employer, and your spouse therefore may not remember the retirement benefits associated with that employer. This is one reason it is important to do some “discovery” during the divorce specifically as it relates to retirement plans.
Another reason to gather information, even if there is only one current plan to be divided, is that you will not understand the benefit you are dividing if you don’t review the plan document, and you may inadvertently lose out on your share of certain financial aspects of the benefit. This is because, outside of ERISA’s basic vesting and eligibility requirements, plans may be designed hundreds of different ways.
For example, some pension plans have a cash component to the benefit that can be shared with an ex-spouse under a QDRO, but if you don’t review the details of the plan you will not know it has this component. As another example, we have seen pensions with a cash “settlement benefit” component, granted to a certain group of participants after a lawsuit and settlement was reached rectifying some type of mistake by the plan. Often, participants do not even realize they have these benefits. So without gathering the information, important aspects of the benefit would not be addressed in your separation agreement and therefore cannot be included in your QDRO.
For defined contribution plans, such as 401(k) or 403(b) plans, a prior loan taken by the participant could greatly impact -- or even eliminate -- your share of the benefits. Requesting and reviewing the plan information and account statements is therefore critical to ensuring you receive your fair share of the benefits.
Once you understand the breadth and value of the retirement benefits at stake, you may decide to negotiate how much of the share you will receive based on other assets at stake. For example, some spouses prefer to trade some or all of the value in their home or other real property for an equivalent value of their spouse’s 401(k) plan.
These types of valuations are not always straightforward (you are not trading apples for apples), and if you are considering an “apples for oranges” trade, you should seek the advice of an experienced attorney, accountant, or financial planner. The point is, if you don’t take full account of the number of plans at issue, their type, any components they have, and how they are calculated, you will not understand the value of what you are dividing, and how or whether it may benefit you to “equalize” the retirement benefit against other assets.
Draft the Division Language and QDRO
If you are not yet divorced, it is very important to ensure that all aspects of the benefit you will be splitting are spelled out clearly in your agreement because, in the vast majority of cases, the QDRO can only provide the elements of the benefit that have been put into your written agreement.
In New York, for example, if a separation agreement does not state that the ex-spouse is entitled to their share of the pension’s survivor benefit (required by law if the participant is married), he/she may not include it in the QDRO.
In that case (where the alternate payee has no share of a survivor benefit), then the monthly benefit stops on the death of the participant, even if death occurs right after retirement. We have even seen where the alternate payee owes the payment made to her in the month of the participant’s death back to the plan because of the delay in notice to the plan of the participant’s death. Securing a survivor benefit, or providing that the alternate payee’s share be calculated on her life span, eliminates this risk. Consequently, the agreement should identify all aspects of the benefit going to the alternate payee, and (for a pension) whether the benefit is “shared” or “separate” from the participant’s payment stream.”
If your divorce is final, the QDRO must direct the plan to divide the benefit as described in your stipulation, separation agreement, or judgment. Otherwise, your ex-spouse (the participant), and the court, will object to the draft, and you will have to revise it accordingly.
With some pension divisions that require an order similar to a QDRO, like military court orders (called “Military Qualifying Court Orders”), the military agency reviewing the order will also review your agreement, and if your order seeks to provide more than you agreed, such as a survivor benefit, it will be rejected. Consequently, it saves time and money to draft the QDRO or other order according to your agreement.
What if the agreement is not clear about how to divide the benefit? Unfortunately, ambiguity in the agreement is the norm rather than the exception; but that is another reason to use an experienced QDRO attorney to draft your order.
Where the agreement is ambiguous, or fails to address how to handle (for example) a loan, the QDRO attorney will be able to formulate the best strategy for obtaining your fair share in the QDRO. In some cases, the best strategy may require your QDRO or divorce attorney to re-open your matter, or seek other clarification from the opposing side or the court. Regardless of the issue, you or your prior divorce attorney will make out better with the advice of a QDRO attorney who understands the intricacies of these plans, and the various options you may have to address and correct the problem.
Seek Pre-approval from Opposing Counsel (or Your Ex-Spouse)
Except in the situation where your ex-spouse is on the verge of retiring (see below), the next step is to ensure that all parties have approved the draft order. This saves time and expense, and courts require that your ex-spouse be “on notice” if you are asking the court to sign the order. Thus, it is a necessary step.
The most important exception to this step in the process is where the retirement benefits are about to be disbursed. In that case, your QDRO attorney should put the retirement plan on notice as soon as possible, so that the benefits are not dissipated.
Under ERISA, a retirement plan must put the benefits on hold, or segregate the amount owed to the alternate payee, if it is on notice that a QDRO is in process. The period of time for which the hold (or segregation of benefits) is required is from the date the plan is on notice up to the earlier of 1) the qualification of a domestic relations order; or 2) 18 months.
Putting the plan on notice as soon as possible is also critical if your spouse is already retired when you are in the process of divorcing, or will retire shortly after the divorce. In those situations, a well-drafted QDRO will direct the plan administrator how to calculate the share of the benefit that is owed to the alternate payee, which will allow the plan administrator to segregate and hold the AP’s share in a separate account until the QDRO process is complete.
Once the DRO is “qualified” at the end of the process (hopefully before the 18-month hold period expires) the plan will release that segregated share to the AP. In that case, none of the pension benefits owed to the AP have mistakenly gone into the participant’s hands, where it can be difficult to ever recover them.
Seek Pre-approval of the Draft QDRO from the Retirement Plan
By providing the draft order to the plan in advance of asking the court to sign it, the parties will save time and money. Obtaining the plan’s comments or approval on the draft order permits the QDRO attorney and the parties to make modifications to the order and ensure it is drafted to divide the benefits as intended before asking the court to review and sign the order.
As mentioned above, this step also puts the plan on notice that an order is being drafted, so that the plan puts a hold on the participant’s benefits, ensuring the alternate payee’s share is not withdrawn or distributed. The hold is good for a maximum of 18 months from the date the plan is on notice.
That said, a minority of plans interpret the 18-month timeframe to begin only when they receive a certified copy of a court-executed, filed DRO. While this is not the majority of plans, if your ex-spouse is close to retirement, we have seen situations where the plan will allow the participant to proceed with collecting his or her pension if they only receive a draft, unsigned order for pre-approval. (The plan’s QDRO guidelines will spell out how the plan treats a draft order, and the steps for obtaining qualification.) While you would never want to delay the QDRO process, in situations where retirement is imminent, it is a bit more important to move quickly.
Submit the Order for the Court’s Signature, File It, and Request a Certified Copy
This “step” is really a series of steps that end with having a certified copy of a signed, filed order in hand. If it has been more than a couple of years since your divorce, you may have to provide the court with not only a copy of the order (on notice to the other spouse or his attorney), but a copy of your judgment or stipulation (or settlement agreement) so the court can review the division language and compare it to the DRO.
In New York, some county clerks charge a “motion fee” for submitting a DRO for signature, and there are other areas of the country that do this as well. In our experience, there is always a charge for the certified copy.
Submit the Certified Copy to the Plan for Final Qualification
This step is absolutely critical to ensuring the benefits are assigned to the alternate payee. ERISA specifically grants the retirement plan administrator sole discretionary authority to accept and “qualify” the domestic relations order. No matter what your separation agreement, judgment, or the court says--you do not have a QDRO until the plan administrator says so. Qualification can take anywhere from one to four months, however, it is typical for qualification to be much quicker if you have obtained preapproval of the order--sometimes as little as two weeks.
Once qualified, the plan administrator should send a letter 1) telling the recipient the order has been qualified, and 2) providing its interpretation of the order so that all parties understand how the benefits will be divided. This letter is important to retain, particularly if retirement is years away, so that all parties have an understanding of what to expect when they reach retirement age.
If you are dividing a 401(k) or similar plan, it is still important to ensure the benefits have been divided correctly, gains and losses have been accounted for, loans have been treated correctly, and so forth. If the letter describes the division differently than intended, a party may appeal and gain time to revise the order and resubmit it.
Need Help with the QDRO Process?
If you (or your attorney) have questions about the QDRO process or are having trouble obtaining information from the plan, contact McKain Law, PLLC, to see if we can assist you.