Finding the Right QDRO Services
The type of assistance you need to obtain a QDRO will depend on several factors, including the status of your divorce, the number and complexity of retirement plans at issue, and whether or not you already have comprehensive language in a separation agreement, stipulation of settlement, or judgment of divorce. This article will help you determine whether you can rely on a low-cost service or need more intensive, knowledgeable QDRO legal services.
What Are QDRO Services?
“QDRO services” encompass a range of steps that lead to obtaining a domestic relations order that has been “qualified” by a retirement plan administrator, creating a “Qualified Domestic Relations Order,” or “QDRO.” Depending on whether your divorce is final or in process, there are two paths to determining the services you need.
Your Divorce is “in Process”
Done correctly, “QDRO services” start with your divorce attorney requesting the right information from each spouse about past and current employment, and the retirement plans associated with that employment. This is the most important part of the process because it determines what goes into the agreement dividing your assets which, in turn, will determine the wording of the QDRO.
If your divorce attorney is not well-versed in the many ways a retirement plan can be designed, and the numerous ways the value can be impacted on division, he or she should work with an attorney that understands ERISA and is deeply familiar with retirement plan features.
For example, even a request for plan information can be tricky -- asking only for a “model QDRO” or “QDRO guidelines” is not sufficient for understanding the plan’s design and retirement options. Your attorney should keep in mind that a retirement plan administrator has legal counsel whose only client is the plan--not you or your spouse. The plan’s only concern is that your QDRO does not violate the plan’s terms, which would cause it to lose tax qualification. The plan’s models and guidelines therefore only address what is mandatory or prohibited for the plan, and will specifically disclaim that they are giving legal advice to you.
What does that mean? As just one example, it means that the “QDRO model” will not tell you if the participant is fully vested in the 401(k) plan balance (all of the amount on the account statement is actually available for division). Even if you request an account statement, it is not likely to show if the participant is fully vested, rather, you need to examine the plan document and know when participation in the plan started.
To illustrate, the account statement may show $50,000 in employee contributions and $20,000 in employer contributions, or it may just show $70,000 in the account. Either way, if the participant is, say, only 60% vested in the employer contributions, that means only the $50,000 is available for division at this point in time.
It is important to know this so that the correct language goes into the separation agreement, and a properly drafted QDRO can then direct that the unvested portion be divided when it becomes vested. In other words, if you are the alternate payee, you don’t want to miss out on those unvested contributions, which were earned during the marriage, and are therefore marital.
Alternatively, we have seen participants lose out in the above scenario, by promising 50 percent of the entire account balance, even though they do not yet “own” the employer contributions. If the participant is about to leave that employer and specifically promises one-half of the total $70,000, directing in the agreement that the ex-spouse will receive “$35,000,” then the participant is left with $15,000 ($50,000 - $35,000) if she or he leaves employment prior to becoming fully vested. In that case the participant has given more than half of the marital share to the alternate payee.
If a pension plan is at stake, there is certain information you will only glean from the plan document or SPD (summary plan description); for example, those documents will describe the joint and survivor options available under the plan, and provide the definition of earliest retirement age, among other important characteristics.
Even the plan document may not, alone, indicate whether the plan permits a “separate interest” stream of payments or only a “shared payment” approach to the alternate payee’s benefits. These are plan characteristics that often are best determined by an ERISA or QDRO attorney that knows what to look for, so that you understand what you’re entitled to and your agreement is drafted to reflect your informed choices.
Once the benefits are analyzed, the division is agreed upon by both parties, and everything is in writing, the QDRO services that remain are important but less “substantive.” You do need a clearly drafted QDRO, and that typically requires retirement plan knowledge and is more substantive, but if your agreement has clear language, the QDRO itself is modeled on that language, and therefore is more “form” than “substance.” At this point you might be able to switch to a less costly “QDRO service provider” to finish the process.
In fact, we recommend that divorce attorneys draft the QDRO prior to finalizing the separation agreement, or before going into open court to stipulate to the agreement on the record; the attorney should attach the (fully vetted and hopefully pre-approved) draft QDRO to their agreement as an exhibit, or refer in court to the draft QDRO as an exhibit, as the best way to fully protect both parties in the process. Once the language is solid and/or the draft QDRO is fully vetted and pre-approved (see below), switching to a less costly service provider can be beneficial.
After the QDRO is drafted and agreed on by both parties, it is preferable to submit it to the plan for pre-approval. At this stage the plan can let you know if there is some reason it would reject your QDRO. If your QDRO attorney has reviewed the plan document prior to drafting your Order, there is little reason it would be rejected, because your order will have taken into account all plan requirements. Reviewing the plan document therefore smooths out the entire process.
If the plan does require a change, then the QDRO can be revised accordingly, and the order will be submitted to the court for signature and filing. Obtaining pre-approval ensures that when it is finally submitted for qualification it will be approved.
Prior to submitting the order to the court for signature, your divorce attorney should know if the court or judge requires provisions in the QDRO that are additional to ERISA’s requirements. For example, ERISA does not require the parties to sign a QDRO, or for the parties’ social security numbers to be redacted, however, your state court or your particular judge might have these “form” requirements. Your divorce attorney should know about such state “court-specific” requirements.
The remaining QDRO services consist of ensuring that the plan’s qualification submission rules are followed, such as providing a certified copy of the QDRO, or a copy of your judgment along with the certified copy of the QDRO. Last but not least, your process should include the receipt of a qualification and interpretation letter, informing you that the order has been accepted, and describing how the plan will split the benefits.
In sum, if your divorce is “in process,” the QDRO services you need will require more expertise at the start of the process. If you use a knowledgeable attorney to analyze the plan, advise you or your attorney on the benefits at stake, and draft your separation language, you may be able to use a less costly “QDRO service” to complete the drafting and submission parts of the process.
Your Divorce is Final
Most attorneys become very good at the areas in which they practice regularly. For divorce attorneys, that is the divorce law of the state in which you reside. But most retirement plans are governed by federal law. Retirement plans overlap into state law where divorce occurs, because the retirement benefits are divided in the divorce. But because most divorce attorneys have only a very basic knowledge of various types of retirement plans or their design, the division language in the separation agreement is typically problematic when it comes time to draft the QDROs or divide the IRAs.
In fact, many divorce attorneys will not even handle QDROs; instead, they tell the client after the divorce is final that they need to find an attorney or service to draft the QDRO. The problems arise because the QDRO must reflect the language of the agreement and, if that language is insufficient, or too much time has passed since the divorce, getting the QDRO drafted and approved is like running an obstacle course. This is where you will need an attorney who understands the rules that retirement plans must follow.
What Types of Obstacles Arise? Every divorced couple is unique, so it’s impossible to describe all the issues that might arise on the path to obtaining a QDRO. However, most of the post-divorce stumbling blocks fall into these general categories:
The Agreement Language is Vague. If your divorce agreement simply states that the ex-spouse gets “half of the pension,” half of the “marital share,” or “50% of the amount earned during the marriage” it’s likely that you will have lost some portion of what you are entitled to. For example, this language would not include: the gains on your share of the 401(k) funds; or pre- or post-retirement survivorship benefits on a pension.
Worse is where the vague language refers to a “coverture” share in relation to a 401(k) or other defined contribution plan, because that language is specific to a defined benefit plan (a pension) and, if the court insists on applying that type of formula to a defined contribution plan, the alternate payee will receive less than a fair share of the account.
The Identifying Plan Information is not Provided or Clear. Many employers have more than one plan. If the divorce agreement states that the “pension” with the “employer” will be divided in half, and ten years has gone by, you must make a formal request for the plan documents to determine which plan to divide and where to direct a QDRO. Although federal law permits alternate payees to obtain this information in the same way a participant would obtain it, many plans still (wrongly) require the participant’s authorization.
The Defined Contribution Plan Service Provider has Changed. Even if your agreement does provide gains and losses on your share of a 401(k) or similar plan, if the employer moved the plan from one financial management company to another since your divorce, the ability to direct gains and losses in the QDRO has either been lost, delayed, or made more costly. This is especially true where years have passed, and your ex-spouse refuses to cooperate.
Depending on the situation, you may need to leverage federal law to obtain the information or go back to your state court to ask the judge for assistance in obtaining it. Alternatively, you may need to agree on a figure with your ex or the court, and be satisfied with the approximate amount owed, and no gains on that amount.
Your Ex has Depleted or Reduced the Defined Contribution Account with a Loan or Distribution. We recently dealt with a situation where the participant took a loan for all but $1,200 of the account using the expanded loan option enacted by Congress in response to COVID-19. In a case like that, the alternate payee’s share won’t be available for a QDRO until the loan is repaid under a 5-year repayment agreement, and the court must determine whether the participant still has the funds and will return them, or pay the amount owed some other way.
In these and many other situations, an inexpensive “QDRO service” is not going to have the expertise or ability to go up against the plan or your ex-spouse and correct, or obtain, the information needed to draft the QDRO. A QDRO attorney, working with you and/or your divorce attorney, will likely be able to offer the best options to resolving these types of problems.
Understanding the QDRO Process
To determine the QDRO services that work best for you, consider where you are in the divorce process. If you are in the process of getting your divorce, ask your divorce attorney how familiar they are with retirement plans, and whether they will request detailed retirement plan information about past and current employers during discovery. If they do not seem familiar with this area, ask if they are willing to work with a QDRO attorney to request the right information and determine the benefits at stake.
If you are already divorced and your agreement language on retirement plans is clear and complete, you may want to check with inexpensive QDRO service providers to see if they can meet your needs. Be aware, however, that sometimes these providers charge $300-$500 and are unsuccessful at obtaining the QDRO. In that case you still might end up hiring a QDRO attorney and starting over to draft and complete the QDRO.
If your divorce is final and there are potential obstacles to drafting and getting your QDRO qualified, you will be better off working with a knowledgeable ERISA attorney who has experience with QDROs. An ERISA attorney will be familiar with the rules a plan and employer must follow in providing plan information and approving your DRO. In the long run this will save you time and money.
Common Questions
Is it Expensive to Hire a QDRO Attorney? It might feel like you can’t afford to hire a knowledgeable attorney to handle your QDRO matter, but we encourage you to make a cost-benefit analysis, and take stock of the retirement you have for yourself already. In typical QDRO situations, the retirement money at stake is either a significant 401(k) account balance that will continue to grow until you retire, or 20-30 years of future monthly annuity payments that will be in addition to your expected Social Security. These amounts can be all the difference between retiring on time or living more comfortable during retirement. For more specific information, read our article How Much Does a QDRO Cost?
How do I Determine the Amount at Stake? If you didn’t get an estimated benefit during your divorce, you can request one now, even if your divorce is final. Some factors that may help you determine what is at stake are: the length of the marriage; the length of employment and how much of that time was during the marriage; and the size of the employer providing the benefits. Generally, the longer the marriage and employment, and the larger the employer, the greater the benefits at stake. That said, those are general factors and some small employers offer generous benefits, so it is best to request plan information.
Need Assistance with your QDRO?
If you or your attorney need assistance determining the benefits at stake, obtaining plan information, or drafting or qualifying a domestic relations order, call McKain Law at (607) 277-4433 or contact us here to see if we can help.