How many ways can a delay on a QDRO (Qualified Domestic Relations Order) cost you? A QDRO is the legal document that assigns a portion of a retirement plan to a spouse, former spouse, or child in the case of a divorce. A QDRO can be a valuable tool for ensuring that both parties receive a fair share of the retirement assets accumulated during the marriage. However, a QDRO must be prepared and submitted in a timely manner, otherwise it may result in serious consequences for the alternate payee (the person who receives the benefits).
A very common such case involved a couple who divorced in 2010 after 25 years of marriage. The husband was a participant in a defined benefit pension plan that provided monthly payments for life starting at age 65. The divorce decree stated that the wife was entitled to 50% of the husband’s pension benefits accrued during the marriage. However, the decree did not include a QDRO or specify how the benefits would be calculated or paid.
The wife’s divorce attorney told her that she’d have to draft a QDRO and submit it to the plan administrator for approval at some point in the future, but incorrectly asserted that it would have to wait until retirement. In the end, she did not finalize the QDRO with the plan until 2018, eight years after the divorce. By then, the husband had already retired and started receiving his pension payments. The plan administrator informed the wife that she would receive her share of the benefits from the date of approval of the QDRO, not from the date of divorce. This meant that she had lost eight years of benefits that she was entitled to under the divorce decree.
The wife sued the plan administrator and her attorney for negligence and breach of fiduciary duty, claiming that they failed to process and approve the QDRO in a timely manner. She argued that she should receive retroactive payments from the date of divorce, as well as interest and penalties. However, the court ruled against her, finding that the plan administrator had not violated any duty. As for her attorney, it was her word against his when it came to his advice about waiting until retirement to file the QDRO.
The court explained that under ERISA (the Employee Retirement Income Security Act), a QDRO is only effective from the date it is approved by the plan administrator, not the date of divorce. Further, a QDRO cannot, by law, cause the plan to pay any more than they would in the absence of a QDRO. The court also noted that the wife had not taken any steps to expedite or monitor the progress of the QDRO process, and that she may have a remedy against her ex-husband for the past pension payments but that her delays might also mean that she’s only awarded part of the arrears. She declined to sue her ex-husband because she knew he had already spent the money and that it would be fruitless to try to recapture old pension payments from his past.
In the end, she lost out on hundreds of thousands of dollars in pension benefits that she could have received if the QDRO had been submitted and approved earlier.
This case is not unusual – the fact that most divorces postpone the QDRO until “some time after the judgment” and “before retirement” means far too many people lose out on benefits because they wait too long. This example, drawn from many such stories, illustrates the importance of preparing and submitting a QDRO as soon as possible after a divorce or separation involving retirement assets. A QDRO can protect the rights and interests of both parties, but only if it is done correctly and timely. Otherwise, you may end up in a QDRO horror story like this one.
