The Pitfalls of a Qualified Domestic Relations Order
On the surface, dividing a retirement plan may seem like a simple task to divorcing couples. Rest assured, this is usually not the case, and it pays to have a lawyer who understands qualified domestic relations orders (QDROs).
What is a QDRO? A QDRO is a court-issued order that divides a retirement account, usually with a spouse as a result of divorce. Under the Employment Retirement Income Security Act (ERISA), certain retirement plans are qualified, such as 401(k)s plans, individual retirement accounts, Keoghs and traditional pension plans. One reason you want a QDRO is because ERISA enables the plan administrator to distribute assets to the other party without taxation and penalties for early distribution.
Some common pitfalls in dealing with a QDRO include:
- Lack of details. Say the intent of the QDRO is to divide the retirement plan 50/50, but the order states a monetary amount instead of a percentage. Values of vested plans vary. When a QDRO states a spouse is to receive $50,000, but the assets double in value and turn into $200,000, the spouse doesn’t receive half and instead only receives a quarter of the account. Likewise, if the value decreases to half its current value, the spouse receiving $50,000 receives the whole retirement account.
- Nondivisible accounts. Not all retirement accounts are qualified, which means they aren’t divisible. A QDRO that fails to recognize the type of account leaves the spouse who expects distribution with nothing.
- Surviving spouse benefits. The QDRO must specify that the surviving spouse receives benefits regardless of when the other spouse dies. When this detail is omitted, the plan administrator lacks the authorization to distribute any funds to the surviving spouse.
During your Long Island divorce, addressing emotional issues can be stressful, and you may be tempted to skim over a QDRO. Instead, consult with an experienced law firm that can ensure your QDRO is handled properly and you receive your fair share.