9 Reasons Not to Delay in Obtaining Your QDRO

November 11, 2012
By Clifford Petroske

The resolution of a divorce action, whether by trial or settlement, can take months or sometimes years. Understandably, after receiving the judgment of divorce, many people are less than eager to seek yet another order from the Court. However, if you are entitled to share in your (former) spouse’s retirement benefits you will have to get a separate order at the conclusion of the divorce called a Qualified Domestic Relations Order (QDRO)(or just plain Domestic Relations Order if it’s a government plan) before you can receive anything from the pension or retirement account.

The judgment of divorce by itself does nothing to get you paid. Even if your settlement agreement, trial decision, and/or Judgment of Divorce states that a pension or 401k is to be divided between the parties, most pension administrators will not actually split the pension without a QDRO. The QDRO is a special order that identifies the exact name of the plan, the Participant (also sometimes referred to as the Member or employee spouse), the Alternate Payee (also sometimes referred to as the Former Spouse or non-employee spouse), the exact amount or percentage to be awarded, or a formula to be used to calculate the award, and other terms required by law.

Unappealing as it may seem, there are numerous reasons why you do not want to wait to apply for a QDRO.

  1. The Participant May Retire: If the Participant spouse is close to retirement age at the time of the divorce, it is especially important to begin the QDRO process immediately. If there is no QDRO in his employee file when he retires and begins collecting benefits, the non-employee spouse will get nothing and may not be able to recover her share retroactively. At a minimum, it will be a costly fight if the non-employee spouse must go to court to enforce a retroactive pension claim.  Also, the Participant may be required, under the terms of the divorce judgment, to elect a specific option at retirement with a death benefit for the non-employee spouse. However, if there is no QDRO on file, the plan administrator will not be aware of this requirement, and the Participant may elect a different option without a survivor option, or even put his new spouse as the surviving “spouse.” This can be a disaster — it may not be possible to reverse the wrong designation, leaving the non-employee spouse penniless if her former spouse dies first. Of course, this can be avoided if the proper QDRO is on file with the plan administrator well in advance of the Participant reaching retirement age.
  2. The Participant May Die Prior to Retirement: Even if the Participant is not close to retirement age, the non-employee spouse risks losing a pre-retirement death benefit if the QDRO is not on file at the time of the Participant’s death.
  3. The Participant May Take a Loan: Many plans allow Participants to borrow against their benefits. In this case, it is best to have a QDRO in the employee file that forbids any borrowing that might effect the non-employee spouse’s interest, until it can be paid out.
  4. The Parties May Relocate: The party who applies to the Court for a QDRO is required to provide notice to the other party. If many years have passed, and the party applying for the QDRO is unable to locate his former spouse, it may delay the process.
  5. The Participant May Withdraw Funds: If the Participant has liquidated a 401k or other deferred compensation account prior to the entry of a QDRO, the QDRO is meaningless. The other spouse would then be limited to further litigation to obtain a money judgment equal to the amount lost, but this is costly and uncertain litigation. If the Participant has already spent the money and does not have other non-exempt assets, there may be no remedy.
  6. The Participant May Roll Over Funds to Another Account or the Plan May Change Recordkeepers: Even if the account is not liquidated but is simply moved to another financial institution, this can cause huge problems and delays. First, this transfer (or rollover) may not be discovered until after the non-employee spouse gets a QDRO for the first account, which no longer contains the funds. The QDRO would not suffice for the new account, so a new QDRO would be needed. Second, most non-employee shares in retirement accounts include interest and dividends from the date of the original divorce settlement agreement (or from the date of the original judgment of divorce). If the funds have been transferred to a new financial institution, the new financial institution will often not possess the records from the old 401k that are needed to add interest and dividends from the date of the original agreement. In that case, attorneys (or their paralegals) must review years of account statements (assuming the statements can be obtained) to manually calculate the gains (and possibly losses) on the non-employee’s share. This assumes that the Participant spouse is persuaded to cooperate. Often cooperation is lacking, and a court application is needed as well.
  7. Records Necessary to Prove a Separate Property Credit May No Longer Exist: If the Participant spouse had funds in a deferred compensation account at the time of the marriage, those funds are her separate property, and the non-employee should not share in those funds. However, it is the burden of the Participant to prove the amount of the pre-marital funds. Most financial institutions maintain account records for a limited period of time, often seven years. If the account records from the date of marriage are no longer available when the QDRO is being prepared, the Participant may have to forfeit a portion of her separate property to the other party.
  8. It Takes Time for the QDRO to be Signed by a Judge: Even under the best scenario, where the other party has no objections, in Suffolk County it takes up to nine months from the date that the proposed QDRO is submitted to the Court for it to be processed by the clerk’s office and signed by a judge.
  9. The QDRO May Need to be Amended: While many plan administrators will review a draft QDRO before it is signed by a judge, some will not. In those cases, the parties may not know until after the QDRO is granted by the Court and served on the plan, that it violates technical plan provisions and will not be honored (i.e. “qualified”). For example, the plan may prohibit the calculation of an award between two dates, may not allow for a pro rata survivor benefit, or may not calculate awards prior to a certain valuation date. If the QDRO contains a prohibited term, it will have to be amended and re-submitted to the Court in order for the distribution to be effectuated. While this situation is rare, additional time should be allotted for such a possibility.

In practice, the task of submitting a proposed QDRO to the Court usually falls on the non-employee spouse, since he/she is the party who benefits from the QDRO. However, sometimes it makes sense for the employee spouse to take the initiative. For example, if you want to take a loan from your 401k and are restrained from doing so until your former spouse receives his/her share of the account, you may want to have the award paid out quickly. In the case of a defined benefit pension, it is best to have the QDRO on file well before you submit your retirement application, to avoid any efforts by your former spouse to delay your retirement while he/she tries to obtain a last minute QDRO from the Court.

The bottom line is that you may think you are giving yourself a much needed break at the end of your divorce, both financially and emotionally, by putting off the task of obtaining a QDRO. However, if you procrastinate on this important task, you may find yourself involved in costly litigation with your former spouse again one day, perhaps even ten or twenty years in the future. It is best to get it out of the way now, so you can move forward in your post-divorce life with one less thing to worry about.