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 a in number of 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 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.
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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.
In fact, 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.
Many people mistakenly believe they must finalize their divorce before filing a QDRO. Actually, 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 partner with financial advisors (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.
