How QDROs Affect a Couple's Retirement Savings

Roughly half of all marriages in the United States end in divorce. Consequently, many married couples currently planning for retirement may eventually need a Qualified Domestic Relations Order (QDRO). This legal order, often issued by a state court, divides a couple’s interest in an employer-sponsored retirement plan in the event of divorce, separation or annulment.

For those contemplating legal dissolution of their marriage, it is important to understand how QDROs work, how and to whom they may assign benefits, and the challenges divorce attorneys face when drafting these often complex documents.

QDROs: The Nuts and Bolts

Even though state domestic relations law governs divorce settlements, any division or relegation of retirement benefits must comply with the federal law governing pensions and benefits, namely the Employment Retirement Income Security Act of 1974 (ERISA) and with the Internal Revenue Code of 1986 (IRC). Under the terms of both ERISA and the IRC, a QDRO can be issued to a plan administrator, who, upon confirming its validity, may distribute employee pension benefits among the parties identified in the QDRO.

Creating a Foolproof QDRO

Anyone contemplating a divorce should understand this: Without a QDRO, there can be no legal division of employer pension benefits. Therefore, it is essential that the attorneys representing each party in a divorce hammer out a detailed agreement over any division of benefits covered under a QDRO. One common mistake that divorcing couples often make is hiring the same attorney to represent both of them in the drafting of a QDRO. No matter how amicable a divorce is, QDROs are not "share and share alike" documents. For a QDRO to be truly equitable, it must be crafted with input from both sides.

QDRO Quicksand: Traps to Avoid

QDROs are complex, detailed legal agreements. Even experienced divorce attorneys can make mistakes when drafting them. According to the Atlanta-based law firm of Davis, Matthews and Quigley, common QDRO errors include:

1. Relying on inadequate or erroneous information about a retirement plan. Many QDROs refer to retirement benefits simply as “retirement plans.” Big mistake. Are the plans “defined benefit” or “defined contribution” or both? Your attorney must understand the specific plan you have, and spell in out, in detail, in the QDRO.

2. Trying to divide a plan that is legally indivisible. There are many types of retirement plans that do not fall under ERISA and cannot, therefore, be divided. Finding this out after the ink has dried on the divorce settlement is disastrous for the party on the wrong end of the surprise.

3. Using an incorrect plan name in the QDRO. Again, specific, accurate information is vital to the proper execution of a QDRO.

4. Failing to assign liability for outstanding loan balances. If a couple borrows against their pension savings, do both assuming responsibility for repayment of the loan in the event of divorce?

Find the Right Lawyer

Employer pensions may eventually disappear, replaced once and for all by individual contribution retirement options such as IRAs and 401ks. For now, if you and your spouse are contemplating divorce, it is important that each of you engages an attorney with formidable experience in pension issues, and in the execution of QDROs. Many capable attorneys have such experience. Others work regularly with experts in QDRO law to guarantee that the final outcomes of divorce settlements are acceptable to all parties. Don’t be afraid to ask detailed questions about your prospective attorney’s QDRO experience. The stakes are too high—and mistakes too common—for you to assume that all attorneys understand this esoteric corner of domestic law.

Final Thoughts

Finally, because divorce law varies so much from state to state, do not rely on some online “one size fits all” QDRO form. Hire an experienced, local divorce attorney who understands QDRO requirements of the state in which you live. Your attorney should also thoroughly understand the unique financial goals and challenges that you, the client, bring to the divorce proceedings. Online forms are no substitute for real legal counsel. No one wants to finalize a divorce settlement only to determine that the terms to which they agreed are not equitable.

References

• Davis, Matthews & Quigley: “Top Ten QDRO Mistakes Experienced Lawyers Make” by Emily Widmann McBurney
• The US Department of Labor: FAQs about Qualified Domestic Relations Orders

Resources

• Divorce Magazine: "What You Should Know About QDROs"
• The US Department of Labor: "Drafting Qualified Domestic Relations Orders"