If you are planning to get a separation or divorce and your spouse has an employer sponsored pension plan, such as a 401 k, you may be legally entitled to a share of the balance. How do you stop your spouse’s or ex-spouse’s employer from paying out the entire benefit to your former spouse? A Qualified Domestic Relations Order (QDRO) can protect your interests.
A QDRO is a court order that directs a pension plan administrator to make a direct payment of a portion of a participant’s benefits to his or her former spouse. The former spouse is also referred to as the “alternate payee”. This order is usually included in a divorce agreement and may specify the amount of benefits to be awarded as well as how to calculate the amount of benefits awarded to the former spouse. QDROs only apply to plans that are tax-qualified and covered by the Employee Retirement Income Security Act (ERISA). They do not apply to military or government pensions. However the order in the divorce agreement is only a domestic relations order. An order only becomes qualified when it is reviewed and deemed to be qualified by the plan administrator.
Most retirement plans offer standard forms that your attorney may use to draft the wording of a QDRO. However, if your share of your spouse’s retirement account is substantial you should consider hiring an attorney who specializes in QDROs to ensure that all of the related issues in your marital settlement agreement are incorporated into your QDRO and that your rights are fully protected. A generic QDRO may not provide such protection. If your attorney is not well versed in preparing QDROs it will take him or her longer to research and prepare the paperwork and this will end up costing you more in legal fees. Also, since the QDRO must follow certain guidelines set up by the plan administrator using an inexperienced attorney could cause you to end up paying for a QDRO that you cannot use.
The former spouse who receives the plan benefit is responsible for paying any associated taxes. He can also choose to roll over the money into his own IRA, take over management of the money, and postpone the taxes until funds are withdrawn from the IRA.
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