Division of a 401K plan and many pension plans require a Qualified Domestic Relations Order (QDRO).

If your divorce settlement agreement states that you will divide a pension and/or 401K plan, a court must order a Qualified Domestic Relations Order, commonly abbreviated as QDRO.
(Note: A QDRO is not necessary to divide an IRA or a SEP. Also, military pensions, federal, state, county and city retirement plans have their own rules regarding division during divorce.) A QDRO will instruct the plan administrator on how to pay the non-employee spouse’s share of the plan benefits. A QDRO allows the funds in a retirement account to be separated and withdrawn without penalty and deposited into the non-employee spouse’s retirement account (typically an IRA).

Many people often make the mistake of assuming that their divorce settlement agreement will fully protect their rights to their portion of a spouse’s retirement account. This is usually not the case, and that’s why it’s critically important to use a properly prepared QDRO.

The QDRO should be completed and presented to the pension plan well before your divorce is finalized. Waiting to complete the QDRO until after the divorce is finalized is recipe for disaster. Consider this common example:

Let’s imagine a scenario in which the divorce has been finalized, and the QDRO requires the pension plan to pay an immediate lump sum amount to the non-employee spouse. And let’s further imagine that the non-employee spouse was relying on that lump sum payment to pay legal fees and other immediate expenses.

The reality is that many pension plans will not pay a lump sum amount and will only pay the non-employee spouse on a monthly basis for life starting at around retirement age, which could be many years in the future. Under these circumstances, the QDRO requesting the immediate lump sum payment would be rejected by the pension plan. If that’s the case, the spouse who was counting on receiving immediate cash to pay their legal fees and other bills is in for a major disappointment. Since the divorce has already been finalized, the non-employee spouse cannot go back to the court and request some other property (cash, stocks, etc.) that would have an equivalent value to that anticipated lump sum payment. The non-employee spouse is now out of luck and may have to wait decades to start collecting their share of the monthly pension payments.

On the other hand, if the QDRO was completed and presented to the pension plan well before the divorce was finalized, the non-employee spouse could have negotiated a different settlement with more cash, for example, once they found out that an immediate lump sum payment from the pension would not be possible.

If You Have Questions Please Feel Free To Contact Our Office.
Ryan K McFarland • 1 (931) 919-4376

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