QDRO Rules and Payments
If one of the parties has accumulated retirement benefits during the marriage, both parties have certain rights to those benefits under the law. The person who earned the retirement benefit through his or her employment is called the “participant.” The other person is referred to as the “alternate payee.” Federal laws governing retirement plans prohibit a plan from paying benefits to anyone other than the participant, unless directed to do so under a QDRO. Accordingly, a QDRO allows the plan to pay benefits to the alternate payee.
A QDRO must meet certain rules under federal law in order for it to be valid and must be issued by a “state authority” (usually a court) through a judgment, order or decree, which addresses a property settlement. Governmental or public retirement plans (e.g., military pensions, federal, state, county or city retirement plans) are not subject to the QDRO rules. These plans typically require a court order for dividing retirement benefits, which resemble QDROs. Since QDROs are governed by federal law, a Qualified Domestic Relations Order in California is basically the same as a QDRO to be filed in other states.
The division of the plan can be calculated several ways. Unless the Marital Settlement Agreement (MSA) or judgment provides a specific dollar or percentage amount payable to the alternate payee, a formula is usually used based upon several variables that instructs the plan administrator how to compute the amount payable to the alternate payee. It is a common misconception that the QDRO will include the amount payable to the alternate payee.
If the plan allows for a lump sum distribution, the alternate payee can elect to receive his or her share in one single payment or to roll over his/her share to an Individual Retirement Account (IRA) or other eligible plan. This is typical of 401(k) or profit sharing plans. Defined benefit plans generally only pay benefits in monthly installments or “annuities.” If the plan will only pay benefits in the form of an “annuity” the alternate payee will typically receive monthly payments for life.
QDRO Process Timeline
In the majority of cases, the process of obtaining a valid QDRO takes two to four months from the time that the drafting of the order begins. The length of the process will vary from case to case and depends on several factors, many of which are beyond the control of the preparer. These include variables such as the amount of time it takes for the court to issue the QDRO or the time it takes for the plan administrator to formally approve the QDRO.
A QDRO isn’t always included in the divorce process, and many couples find that after paying high fees to their attorney, that the QDRO is not included or the firm does not prepare them.