Don’t wait on your QDRO (Qualified Domestic Relations Order). Why? A QDRO divides a retirement plan or pension between two parties, usually as part of a divorce settlement. In addition, it secures the rights of the non-employee to their share of the funds so that death, retirement, or hardship withdrawals of the participant won’t affect the non-employee’s share.
The QDRO specifies how much of the retirement benefit each party will receive, when they will receive it, and how it will be taxed. A QDRO is essential to protect the rights and interests of both parties, especially the non-employee spouse who may otherwise lose access to the retirement benefit.
However, a QDRO is not effective until it is approved by the plan administrator and implemented by the plan. This process can take several months or even years, depending on the complexity of the QDRO and the cooperation of the plan. During this time, the parties must monitor the status of the QDRO and ensure that it is being processed correctly. Otherwise, they may face serious consequences if something goes wrong.
As a QDRO attorney, I do not exaggerate when I say that I hear these horror stories every week. The following is based on a few of those stories, with details and names changed to protect confidentiality.
Jane and John were married for 25 years and divorced in 2015. John had a 401(k) plan with his employer that was worth $500,000 at the time of the divorce. Jane was entitled to 50% of the 401(k) balance as part of the divorce settlement. Jane’s attorney prepared a QDRO that awarded her $250,000 from John’s 401(k) plan and submitted it to the plan administrator for pre-approval.
The plan administrator never approved the draft QDRO. Neither Jane, John, nor their attorneys followed up with the plan administrator, nor did they file an order with the court. As a result, the plan administrator never transfered Jane’s share of the 401(k) to a separate account in her name.
In 2019, John retired and decided to withdraw his entire 401(k) balance in a lump sum. He received $600,000 from his 401(k) plan and paid taxes on it. He did not inform Jane or share any of the money with her.
In 2020, Jane learned that John had withdrawn his 401(k) balance and that she had not received any of it. She contacted the plan administrator and discovered that the QDRO was never implemented. She demanded that the plan administrator pay her $250,000 plus interest from John’s 401(k) account.
The plan administrator refused to pay Jane anything, claiming that John’s withdrawal had depleted his 401(k) account and that there was no money left for Jane. John argued that Jane had waited too long to claim her share of the 401(k) and that she had waived her rights by not following up on the QDRO.
The parties ended up in court, and while the court ruled that John owed Jane funds, it cost her tens of thousands of dollars in legal fees to get that ruling. In the meantime, John had spent all of the money and ended up moving to Central America to retire, leaving Jane with no way to recoup her funds, nor any way to pay her legal bills.
Jane was left with no retirement benefits from John’s 401(k) plan and no recourse against him or the plan administrator. She lost $250,000 plus interest and had to pay legal fees for her unsuccessful lawsuit.
If that sounds like an extreme tale, it is not. As I said, every week, I hear a different version of this story, such as:
- The QDRO was signed by the court but never forwarded to the plan, so the plan let the employee withdrawal all of his funds;
- The parties didn’t know they had to complete a QDRO;
- The misinformed divorce lawyer incorrectly told the parties that they should wait until retirement to complete the QDRO and the employee-spouse died;
- The non-employee spouse was too broke to pay for a QDRO and, while he was saving up, the employee-spouse rolled the account over to an IRA;
- The QDRO was received by the plan, but never implemented because it was lost on a desk;
This story illustrates the importance of following up on a QDRO until it is fully implemented by the plan. Your divorce agreement is not a guarantee of receiving retirement benefits; You still need to property use the QDRO, which is a tool to secure them. The parties must take responsibility for ensuring that their rights are protected and their interests are served by the QDRO, and that the QDRO is approved by the parties, the retirement plan, and the court, and executed by the plan, as soon as possible after the divorce. Otherwise, they may end up like Jane: with nothing but regrets.
