Contributed by: Jacki Roessler, CDFA®
It’s the end of an arduous divorce process. You and your spouse have agreed on parenting time, spousal support, and what to do with the house. It hasn’t been easy. You’re more than ready to sign the Judgment of Divorce and move on to the next phase of your life.
As you’re signing all the documents, your attorney mentions that you need a QDRO and you should get it done sooner rather than later. You put it off. You’re not exactly sure what a QDRO is and you’re overwhelmed with helping your family adjust to its new normal.
To say this is a big mistake is a big understatement. Getting the QDRO (short for Qualified Domestic Relations Order) done needs to be at the top of every divorced spouse’s “Do it Now!” list. The longer the wait, the more the settlement is at risk because there’s a much greater chance something could go wrong.
First things first, what is a QDRO and what is the harm in waiting?
A QDRO is a legal document used to divide a qualified employer-sponsored retirement plan (i.e a 401(k), 403 (b), pension, etc…) under a divorce. Based on the federal law ERISA (Employee Retirement Income Security Act), the only way to divide a 401k type plan is with a QDRO. The Judgment of Divorce can’t be used for that purpose unless the terms of the QDRO are embedded in it. Furthermore, the only one with authority over “qualifying” a QDRO is the plan administrator. ERISA grants them ultimate decision-making authority.
What can go wrong if there is a delay?
Where to begin? One common issue occurs when a 401(k) account owner takes a distribution, loan, or rollover before the QDRO is entered, thereby reducing or even eliminating the former spouse’s access to their share.
For example, John and Samantha divorced in 2019. Samantha was awarded 50% of John’s 401k account with Acme Widgets. She waited two years to retain an expert to prepare her QDRO. In the meantime, as a result of being laid off, John took a CARES Act distribution that liquidated his entire 401(k). Remember, the Judgment of Divorce is only binding on the parties; it’s not binding on third parties like insurance carriers, credit card companies, or plan administrators. Without a QDRO in place, Samantha didn’t have any legal right to the money in John’s 401(k) so the plan let him do what he wanted with it.
Now let’s suppose that Samantha only waited 3 months to get the QDRO prepared. John’s employer changed custodians and the new custodian no longer had a record of his account balance on the date of divorce. Surprisingly, account custodians aren’t required to maintain any historical records. In this case, the QDRO is rejected and the parties are left to negotiate what happens next.
Of course, no one wants to hire an attorney again and hash out a QDRO issue in front of the judge. Imagine how much worse it would be if someone has to take their ex-spouse’s estate to Court.
Consider the case of Mike and Carrie. Mike was to receive 50% of Carrie’s pension with General Motors. The QDRO wasn’t entered and Carrie died unexpectedly in an accident. Of course, her new spouse was named beneficiary and he was the one that began receiving survivor benefits on the pension. Mike wrote a letter to the plan and gave them a copy of his Judgment of Divorce which stated he was supposed to be the beneficiary. The Plan responded by telling him to get an attorney; they weren’t bound by the Judgment of Divorce.
These are only a few of the many things that can go wrong when the parties wait to enter the QDRO. Once they leave the courthouse and they don’t have a QDRO in place, it’s almost as if a time bomb waiting to go off is hanging over their head. It’s possible nothing could go wrong, but if it does it could be disastrous. If you need a QDRO, make sure that it's at the top of your priority list.
Jacki Roessler, CDFA®, is a Divorce Planner at Center for Financial Planning, Inc.® and Branch Associate, Raymond James Financial Services. With more than 25 years of experience in the field, she is a recognized leader in the area of Divorce Financial Planning.
Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal advice matters with the appropriate professional.