Originally written by Lisa A. Cummings, Esq. and republished with permission.
Individuals going through a divorce will usually find their 401(k) or pension plan account must be divided with their ex-spouse. Below are some of the most important mistakes individuals should avoid when preparing a Qualified Domestic Relations Order (QDRO). Federal law requires a QDRO must be prepared whenever a retirement plan participant becomes divorced if their spouse or children are to receive a portion of their retirement plan account.
The QDRO document must first be submitted and approved by the divorce court. After the court approves the document, then it must be provided to the 401(k) plan’s administrator to determine if the document meets all the requirements to divide the retirement plan account.
- Delays in Preparing/Filing the QDRO: Waiting too long to address the QDRO can have disastrous consequences. If the participant retires, dies, or withdraws funds before the QDRO is finalized and approved, the alternate payee (the non-employee spouse, former spouse, child, or other dependent) may lose their rightful share of the retirement benefits.
- Incomplete or Incorrect Plan Information: Using the wrong plan name or omitting crucial details about the specific retirement plan can lead to rejection by the plan administrator, causing significant delays and frustrations. It’s crucial to confirm the plan’s name, type (e.g., defined benefit or defined contribution), and other relevant details.
- Confusing Different Plan Types: Defined benefit plans (like pensions) and defined contribution plans (like 401(k)s) have distinct features and necessitate different language in the QDRO to ensure proper division.
- Failure to Address Survivor Benefits: If the participant dies and the QDRO doesn’t clearly assign survivor benefits, the alternate payee could lose out on all future payments. It’s critical to include provisions for both pre- and post-retirement survivor benefits.
- Using Generic Templates: While plan administrators may offer model QDROs, these templates are sometimes confusing for an individual not used to dealing with these ERISA legal documents. If the document omits critical terms required by either or both the Department of Labor and the company sponsoring the 401(k) plan, the plan won’t be able to divide the retirement account and the individual must work with an attorney to revise the order and obtain Court approval a second time.
- Inconsistency with Plan Provisions: A QDRO cannot demand a benefit type or form that the retirement plan doesn’t offer. For example, if a plan doesn’t allow annuity distributions, the QDRO cannot require it.
- Not Accounting for Earnings and Losses: Significant fluctuations in the plan’s value can occur between the division date and the actual payout date. The QDRO should clearly specify how earnings and losses during this period will be allocated to ensure a fair outcome for both parties.
- Lack of Awareness Regarding QDRO Importance: Many individuals, including some legal professionals, may not fully understand the necessity and intricacies of QDROs, potentially jeopardizing a fair division of retirement assets.
- Cost Barriers and Inconsistent Procedures: Drafting and obtaining approval for QDROs can be expensive. Moreover, each plan may have unique procedures and requirements, adding to the complexity.
- Insufficiently Detailed Identification of Parties and Retirement Plan: The QDRO must provide clear and sufficient identifying information for the retirement plan, the participant, and the alternate payee to avoid rejection by the plan administrator. Especially important, the QDRO must note whether a plan loan balance exists and if so, whether the loan balance will affect the division of the assets.
Working with attorneys well-versed in QDRO preparation will help avoid these types of problems and speed up the account division with the ex-spouse.
