QDRO is an acronym that seems to strike fear in the heart of many family law attorneys. Rather than dealing with QDROs themselves, many refer this work to QDRO experts. Regardless of whether or not you chose to undertake the drafting yourself, you should be aware of some of the issues surrounding QDROs and their drafting process.
I do not intend this information to be an all-encompassing review of all that is or is not required for a QDRO to be accepted by a Plan Administrator. Instead, I would like to spend this post discussing issues I have seen in QDROs and giving some recommendations about what you need to know in order to draft a proper QDRO document.
You may already understand a QDRO, or Qualified Domestic Relations Order, is a legal document, issued by a judge, used to divide qualified retirement accounts after a divorce is finalized. Specifically, it directs a Plan Administrator to divide the ex-spouses’ qualified retirement Plans as part of a divorce decree. These qualified plans can include pensions, Employee Stock Ownership Plans (ESOPs), profit sharing and 401(k) Plans, or other qualified retirement plans. If there is a valid QDRO, generally speaking the Plan Administrator will affect the agreed division of funds without taxes or penalties.
One of the biggest issues I find in the QDROs I see is a lack of detail. You can never be too specific, too exacting, or too detailed in your QDRO. One common problem is the failure to specify the percentage of the benefit that is to be paid to the receiving ex-spouse aka the “alternate payee.” Even if a percentage is specified, you need to understand what number that percentage will be based on. Where the division of money is involved, it never hurts to be too careful. In the event the QDRO becomes the subject of litigation, clarity of intent is crucial. Be creative, use examples to explain complicated processes, and be sure the document answers the questions most likely to be raised by a judge.
Another common issue with QDROs is that often drafters use template documents that do not contemplate the plan documents involved. A QDRO cannot ask the Plan Administrator to do something prohibited by the plan document. For example, if there are no in-kind distributions allowed, a QDRO cannot specify that one be made. In that respect knowing what is in the Plan you are dividing is crucial.
It is also worth noting that if the Administrator has a template document; it will likely favor their employee. It is a mistake to think that a QDRO is a neutral document, as it is drafted as part of a divorce—seldom a neutral process. Nonetheless, and with the exercise of due caution, a copy of the template from the Administrator can serve as a guide in your drafting, and the Administrator will likely expect—and appreciate—QDROs that look like their template. Regardless, you will want to have contact with the Administrator to understand the terms of the Plan.
So with that, what is it we want to see in a well-drafted QDRO? Ideally, a drafter will actually have the plan documents while drafting and use them to identify key issues necessary to preparing the document and ask questions in drafting like:
Is the retirement account holder fully vested?
Are there other things, such as COLAs that would affect the division of benefits?
If a percentage is specified, but a participant is not fully vested, a QDRO needs to specify what benefit amount the percentage is referencing and whether the amount that is to be divided includes only the vested portion or both the vested and non-vested portions.
If the participant had a loan out, should the loan amount be excluded from the amount divided?
Is there an agreed date for division? Absent a division date, market changes could significantly impact the parties’ interests.
Where these and other similar issues affect the intended division of funds, the QDRO needs to address them. If a QDRO is ambiguous, or if there are any voids, the Plan Administrator will not accept it.
Once you have a valid QDRO, do not delay in getting it to the Plan Administrator. Although there is no actual time requirement for filing a QDRO with the Administrator, if a participant were to take a loan or distribution in the interim, it could create problems recovering benefits for the ex-spouse. You do not want to be responsible for this outcome.
If you take anything away from reading this blog post, please let it be that you need to do adequate fact finding before proceeding with your draft:
Contact the Plan Administrator and obtain the plan documents;
Identify all pertinent questions flowing from the divorce decree to ensure that your QDRO answers them; and
If you are unsure, ask an expert. (Before long, you’ll be one too!)
To draft a QDRO without all the information needed will no doubt cause it to be rejected by the Plan Administrator, which will in the end send you back to square one.