If you are thinking about getting a divorce or legal separation, or are already in the midst of a divorce, you will likely hear the term “QDRO” mentioned. This stands for qualified domestic relations order and is an exception to the ERISA rule that prohibits the assignment of employer-sponsored retirement. With a proper QDRO, in the context of a divorce or legal separation, retirement monies can be transferred tax-free into a qualified account set up for the non-employee spouse. Although a “QDRO” is specifically an ERISA term, it is often informally used (along with simply “DRO”) to refer to any Court Order required to divide employer-sponsored retirement.
Retirement Accounts and Divorce
When you divorce in Colorado, all the assets acquired during the marriage are subject to division between the two spouses. Colorado uses an equitable distribution approach to dividing marital assets. This means that the assets of the marriage are divided in a way that is fair, but not necessarily completely equal. Any asset acquired during the marriage (with the possible exception of gifts and inheritances) is considered marital property and is subject to division in the divorce.
Retirement assets are considered marital assets if they were opened, added to, or increased in value during the marriage. If the retirement asset was already in existence before the marriage, then only the increase in value that occurred during the marriage is considered a marital asset. With retirements such as a 401(k), the difference in value between the date of marriage and the date of divorce could be easy to calculate. However retirement assets such as traditional pensions can be more complex because the increase is to a monthly benefit at retirement, and not to an account.
Employer-Sponsored Retirement and Divorce
Most of the assets in your divorce are divided by the judgment of divorce, in which the court lays out exactly who gets what. Based on that document, you and your spouse transfer assets into separate names, exchange personal and household property, and get the names on deeds and titles changed. This holds true as well for some retirement accounts (such as IRAs) but not for employer-sponsored accounts, such as military retired pay, thrift savings plans, federal pensions, state and county pensions, private sector pension, and 401(a), 401(k), and 403(b) retirement accounts.
There are a series of federal and state laws that makes employer-sponsored retirement non-assignable, which means they can’t be transferred to someone else. The law was created to protect retirement from creditors seeking payment for judgments they obtained. There are exceptions to these laws for divorce or legal separation, which exceptions permit retirement benefits to be assignable to a spouse, former spouse, or dependent child for the purposes of alimony, child support, or property division as part of a divorce.
How a QDRO Works
Although many plans offer “model” or form QDROs, the terminology used is very technical. It is not recommended to simply use a model QDRO. Many of the models do not properly disclose all of the available options, and since they are created by the Plan, oftentimes they are only designed to make the Plan’s job easier. It is highly recommended that you have a professional properly prepare the required QDRO. The failure to timely and properly prepare a QDRO can have devastating impacts. By way of one example, a Colorado PERA DRO must be prepared, signed by the parties, signed by the judge, and received by the PERA office – within 90 days of entry of the Decree. Failure to timely submit the DRO will render the retirement non-divisible by the plan.
If you or your spouse have employer-sponsored retirement plans that you are going to share, it is very important that you work with your attorney to have a QDRO prepared because it is the only way to divide the funds in that account without incurring massive tax complications. You also cannot and should not trust your spouse to share their retirement funds with you. You have no enforceable right to access those funds without a court order.
QDRO documents themselves are very complex because every pension or retirement plan has its own requirements for the exact language that must be in the order for it to apply to their accounts. There is no generic boilerplate language that can be used, and these orders are highly technical and detailed. Attorneys must work with the plan to determine what language is needed, then create the QDRO, get it approved by the plan, and then have it signed by the judge in the case. Once the QDRO is signed, it is sent to the retirement plan to have the assets transferred.
Because QDROs are so technical and complex, you should never attempt to create one yourself, even if you handle the rest of your divorce yourself. You should always work with an experienced attorney to ensure that the document is correct, enforceable, and fully protects your rights.
It is important that you talk with your attorney and your financial advisor before you receive the funds so that you completely understand the requirements under the tax code and can make the best decisions possible about preserving the money you receive.
Payments for Support
In some circumstances, payments for child support or spousal support can be paid via QDRO. This is an often overlooked option.
QDROs are highly specialized, supremely important documents in divorce cases. If there are retirement assets involved in your divorce, make an appointment with the experienced attorneys at Burnham Law to protect your rights. Call us now at 303-647-9767 to make sure you get what you are entitled to in your divorce.