Qualified Domestic Relations Order - What Is A QDRO?

A QDRO, pronounced "QUAD-row" or "CUE-dro", is short for Qualified Domestic Relations Order. This is a legal order that allows a divorced spouse to receive all or a portion of an employer retirement plan from their ex-spouse. The employee whose interest is being transferred is known as the "participant" and the individual to whom the interest is being transferred is known as the "alternate payee."

According to the Department of Labor – Employee Benefits Security Administration's QDRO exception, "a domestic relations order may assign some or all of a participant's retirement benefits to an alternate payee who is a spouse, former spouse, child, or other dependent of the participant if and only if the order is a qualified domestic relations order."

A domestic relations order is a judgment, decree, or order that is made in agreement with state domestic relations law and that relates to the provision of child support, alimony payments, or marital property rights for the benefit of a spouse, former spouse, child, or other dependent of a participant.

To divide employer retirement assets in the case of divorce a QDRO must be obtained. It must be in writing and can be included a part of a divorce decree or court-approved property settlement or can be issued as a separate order. Benefits of more than one qualified plan of the same or different employers can be addressed in one QDRO as long as benefit rights are clearly specified.

What Every QDRO Must Include

There are several things every QDRO must include:

• The name and address of the participant and alternate payee.
• The name of the Plan from which the benefit is to be transferred.
• The dollar amount or percentage (or method of determining the amount or percentage) of the benefit to be paid out to the alternate payee.
• The number of months or specific period of payments to which the order applies.

What a QDRO Must Not Include

Likewise there are several provisions that a QDRO must not include:

• The order cannot compel a Plan to provide benefits or options not provided under the Plan.
• The order must not require a Plan to grant benefits to an alternate payee if they have already been legally assigned to someone else under a previous QDRO (ex: an ex-spouse from a previous marriage).
• The order cannot call for increased benefits (determined by actuarial value) of the participant's interest in the Plan.

It is common for couple's that have been married for a long-time to build up significant pension or retirement benefits, which can represent considerable value in their marital assets. When splitting up these assets a Qualified Domestic Relations Order (QDRO) will be needed for one spouse to receive all or a portion of qualified plan benefits from the other spouse.

Typical plans that can be divided by a QDRO include defined contribution plans such as 401(k)s, and defined benefit pension plans. For the order to become "qualified" it must be reviewed and approved by the employer's Plan Administrator. Until this happens it is just an order and cannot be legally enforced.

Plan Documents and Valuation

Since no two pension/retirement plans are identical determining the participant's specific entitlements under the Plan are critical. This can be accomplished by asking the Plan Administrator for a copy of the Plans Written Divorce Procedures, which will detail all the specifics of the Plan as they relate to an employee undergoing divorce. Defined contribution plans are very easy to value because they issue monthly or quarterly statements that show the actual cash value of the account.

Defined benefit plans, which pay a specific monthly benefit at retirement and have no current cash value, can be quite challenging to assess. This is because the value of the future benefit needs to be calculated as a present value today. The value of this future benefit is based upon many factors such as years of service, average compensation, age at retirement, etc. and each Plan has a specific formula for how they determine these benefits.

Critical Steps for Implementation

It is critical to obtain all the benefit information and correct valuation of any retirement assets during the negotiation process so that assets are not overlooked and valuable pension benefits are not lost. Once the benefits have been determined, very specific division language needs to be included in the parties settlement agreement (or court order) to be sure that the benefits will be divided properly.

It is extremely important that the order be drafted correctly or a spouse may not be able to collect their portion of the plan benefits. It is a good idea to have the order pre-approved by the Plan Administrator before it is filed with the Court. This way the parties can find out if the language and provisions included meet the Plan's approval.

If pre-approval is bypassed, and the Plan rejects the signed/certified order, the order will have to be amended, re-filed and re-approved. Not only will this waste valuable time and additional processing and legal fees, but also the delay could result in a loss of benefits. If the participant dies, quits, gets fired or retires from their job, or remarries before the QDRO gets implemented the non-participant spouse could potentially lose all their benefits.

QDRO's are complex legal documents therefore it is vital that they be properly drafted to protect the rights of both parties. Because there are so many important issues to consider it is essential to work with an attorney, certified divorce financial analyst or other professional who is skilled in properly preparing these documents. The "devil is in the details" and the smallest mistakes in language could cost thousands of dollars in lost benefit payments.