What Happens If a QDRO Is Not Filed?
- What is a QDRO?
- How to file a QDRO
- QDRO filing checklist
- What happens if you don't file a QDRO in divorce?
- What if the retirement account has been liquidated?
- QDRO glossary of terms
- Need help filing a QDRO?
Going through a divorce requires pulling apart a married life. For many couples, this can be an arduous process, even if they are amicable. When a couple has been together for a long time, they may have built up many assets together, including retirement benefits, all of which need to be divided as per their state's marital property rights laws.
A person’s pension benefit is often considered marital property, or community property. Depending on arrangements, the participant’s benefits may still be received by the other spouse in a lump sum or several payments or installments.
But if a QDRO is not filed in time, one spouse may not end up getting their portion of the benefits. Let’s take a deeper look at this form of benefit and the QDRO procedures you need to understand.
The Employee Retirement Income Security Act (ERISA) was designed to safeguard the rights of retirement plan beneficiaries. Read more about participants’ rights here.
What is a QDRO?
This stands for Qualified Domestic Relations Order: QDRO. It’s a court order that allows an employer-sponsored retirement plan to pay benefits to an alternate payee in lieu of the employee. It's frequently used in divorce proceedings where the other spouse, the alternate payee, is entitled to a significant portion of the retirement plan.
There are different situations where one spouse would be entitled to a portion of the other spouse's plan. Let's say you and your spouse have been married for 20 years. Fifteen years ago, you quit your career to raise your young children. Your spouse started a new job at the same time and, since then, has been contributing to their employer's 401(k). In this scenario, you'd likely be entitled to approximately half the value of the 401(k) over those 15 years. Even though you did not directly contribute money to the retirement account, you contributed to the marriage and would thus be entitled to the money.
One way to get your share is to use a QDRO. When your spouse is eligible to begin taking distributions from the 401(k), you would also be eligible, based on the terms of the QDRO. In the example above, if your spouse only contributed to the 401(k) for those 15 years – all of which you were married – then you may be entitled to half of the distributions. Be aware, however, that this is all subject to negotiation during your divorce.
How to file a QDRO
Filing a QDRO requires some preparation beforehand. Here’s what you need to do.
- Gather information. Collect all information about the retirement plan. This includes plan names, participant and alternate payee details, and the amount or percentage of benefits to be assigned.
- Draft the QDRO. A QDRO should outline the specifics of how the retirement benefits will be divided and distributed.
- Obtain spousal approval. The draft QDRO must be reviewed and approved by your spouse. This ensures both parties are in agreement with the terms.
- Obtain plan administrator approval. Once the spousal approval is secured, the draft QDRO needs to be approved by the plan administrator. They will make sure the document complies with the plan’s rules.
- Get judicial approval.
The QDRO will need to be signed by the judge overseeing your divorce to make it legally binding.
Need help with your QDRO? Our trusted partner, SimpleQDRO, can help.
Timeline and deadlines for filing a QDRO
There isn’t a universal timeline or deadline for filing a QDRO, as it often depends on the laws of your state and the plan rules. It is crucial to file the QDRO as soon as possible; a delay could lead to complications and potential tax implications.
QDRO filing checklist
To promote a timely and accurate QDRO filing, consider the following checklist:
- Gather necessary documents and information about the retirement plan
- Draft the QDRO
- Obtain approval from your spouse, the plan administrator, and the judge
- Send the finalized QDRO to the plan administrator for implementation
What happens if you don’t file a QDRO in divorce?
If a QDRO is not filed, the former spouse may not be entitled to any portion of the retirement asset. This means you could miss out on your share of the retirement funds.
If any of the following occur before a QDRO is filed, you risk forfeiting all of your benefits:
- Your spouse retires
- Your spouse remarries
- Your spouse dies
- Your spouse quits or is fired
- Your spouse withdraws funds from the plan before retirement
- Your spouse takes out a loan secured by the plan account
Here are two examples:
Former spouse remarries before QDRO is completed
A divorcing couple has an IRA that was established during the marriage, and they want to divide it according to the divorce decree. Their QDRO will outline how much of the IRA each party is entitled to. However, the QDRO isn’t completed before the former spouse/plan participant remarries. Thus, the participant’s account is now an entitlement for the new spouse, and the ex-spouse may lose their entitlement to any of the funds.
Former spouse dies before QDRO is completed
A spouse is entitled to a portion of their ex-partner's 401(k) plan as part of the divorce settlement agreement. The QDRO will specify how much of the 401(k) each person is entitled to receive. However, the plan participant’s death occurs before a QDRO is completed, so the funds pass to their heirs, not their ex.
Let’s consider the divorce of Annette and Marcus. They were married for 20 years, and their assets include Annette’s 401(k). However, Marcus never files a QDRO, believing there’s no rush because Annette is still several years from retirement. Tragically, she unexpectedly passes away just a few months after their divorce is finalized. Because of the lack of a QDRO, Marcus loses his entitlement to the 401(k) benefits, which are instead passed to Annette’s heirs.
In another scenario, let’s say Annette remarries before she dies. Without a QDRO in place, the new spouse could claim the entirety of Annette’s retirement benefits, leaving Marcus without his rightful share.
What if the retirement account has been liquidated?
If the retirement account has been liquidated before a QDRO is entered, the legal process becomes more complicated. You may need to consider litigation to recover your share of the funds.
In this situation, a court may treat the retirement funds as marital property that was improperly disbursed. The court could order the offending party to pay the amount equivalent to your rightful share. However, this process is complicated and can be lengthy, requiring thorough documentation.
This scenario underscores the importance of timely filing of a QDRO. Like the proverbial early bird catching the worm, those who act swiftly and decisively are more likely to secure their rightful benefits.
QDRO glossary of terms
Alternate payee: This term refers to the person who is receiving a portion of the retirement benefits under a QDRO.
Plan participant: The individual who has a retirement plan from which benefits are being assigned.
ERISA: The Employee Retirement Income Security Act is a federal law that sets minimum standards for retirement plans.
Plan administrator: This is the entity responsible for managing the retirement plan.
Liquidation: This is the process of converting assets into cash, and withdrawing the retirement funds, often resulting in tax penalties.
Need help filing a QDRO?
Many people mistakenly believe they must finalize their divorce before filing a QDRO. It’s wise to file the QDRO as soon as possible to retain your rights and benefits under your spouse's retirement plan.
Hello Divorce is committed to helping people navigate their lives before, during, and after divorce. This includes your financial life, which is why we offer professional sessions with our CDFAs, who offer flat-rate sessions to our clients.
To help you get through your divorce without missing any important steps, refer to our post-divorce checklist, or call us to speak with a friendly account coordinator during your free 15-minute phone call.
Suggested reading:
Reference
Participant rights. U.S. Department of Labor.
