Utah QDRO: Secure Your Retirement

A Qualified Domestic Relations Order (QDRO) is a special court order that formally divides retirement accounts, pensions, 401(k) accounts, and/or I.R.A. accounts. A QDRO is usually necessary after a Divorce Decree is entered that awards a portion of one parties’ retirement, etc. account(s) to the other party. Once signed by the Judge, the QDRO is given to the plan administrator of the retirement program and usually, based upon the QDRO, a new separate retirement account is established for the non-employee spouse and the benefits will be paid pursuant to the terms of the retirement program. Preparation of a QDRO can be time-consuming and complicated. The content requirements of a QDRO will vary from retirement program to retirement program. Usually, the QDRO must be specifically drafted to include certain language and requirements provided by the retirement program, then submitted to the company for approval before obtaining necessary signatures from the parties and the Court.

A divorce decree often requires the preparation of a qualified domestic relations order (QDRO) when one or both of the spouses has a retirement account such as a 401(k) or pension that need to be split. A QDRO is a court order that provides for the division of a retirement account. After a QDRO, a separate retirement account is created for the recipient spouse and the recipient spouse can choose to roll over their funds to a different account provider. Parties often rely on the funds from a QDRO to help them move forward with their lives following a divorce. Don’t wait to receive your money. The attorneys at Ascent Law will work quickly to ensure that your QDRO is created and processed as quickly as possible. Current law allows the party receiving funds through a QDRO to make a withdrawal at the time of the QDRO without paying the early withdrawal penalty. Although there is no penalty for this withdrawal, the party cashing out money from the 401(k) is responsible for the associated state and federal taxes owing on that money. In negotiating a property settlement, parties should keep in mind that pre-tax dollars, such as retirement funds, are not equal to post-tax dollars, such as equity in the home. This is because of the tax obligation associated with the retirement funds reduces the cash value to the party who receives retirement funds in a settlement. Ensure you receive the best settlement possible by having an attorney at Ascent Law LLC represent you in your divorce QDROs.

When you understand QDROs and retirement accounts, you are in a better position to achieve financial security. Each separate retirement account needs to be listed in a divorce decree, including pensions, 401(k)s, 403(b)s, and IRAs. The Decree needs to state who is being awarded each account. When an account is being divided, the Decree may indicate a dollar amount to be divided as of a specific date or may state a percentage to be divided as of a specific date. Retirement funds earned during the marriage are usually divided as of the day of the divorce. It is very helpful to have the Decree specify who will be responsible for preparing any necessary QDROs and who pays for any associated costs, such as attorney’s fees or plan administrator fees. Spouses normally split their assets when they divorce, but the division of certain retirement savings accounts requires an extra step. In certain cases, you’ll need to prepare and submit a qualified domestic relations order (QDRO) form in the aftermath of a marital split to deal with these assets.

When a QDRO Form Is Required

Your divorce proceedings may culminate in a domestic relations order (DRO) that lays out the division of retirement assets between the participant and the alternate payee. But for a retirement plan administrator to divide assets from a qualified retirement plan covered by the Employee Retirement Income Security Act of 1974 (ERISA), you need a stricter type of DRO known as a QDRO. This is because ordinarily, under ERISA and the Internal Revenue Code, a retirement plan participant can’t legally assign his stake in the plan to someone else. For this reason, most qualified retirement plans won’t pay any benefits to an ex-spouse until he submits a QDRO with the plan administrator. A QDRO is a DRO that meets the rules under the ERISA to let the plan administrator divvy up assets in a participant’s qualified retirement plan. ERISA covers both defined benefit plans, such as pension plans, and defined contribution plans, such as 401(k), 403(b), or employee stock ownership plans. Individual retirement accounts (IRAs) are not covered by ERISA, so you don’t need a QDRO to divide the assets in an IRA. Likewise, your spouse might propose trading another asset in divorce settlement negotiations, such as a house or another investment, in lieu of a share in a retirement account. This would eliminate the need for a QDRO, and keep the participant’s retirement savings on track.

Division of Plan Assets Under a QDRO

A QDRO may require a participant to assign all or part of her retirement benefits to the alternate payee. Naturally, participants who face a QDRO feel uncertainty at the prospect of losing their savings. But in many states, courts will divide only the marital portion of these benefits contributions made and growth associated with those contributions from the date of the marriage to the date of marital separation. Pensions can be tricky to calculate, however, particularly if the participant spouse hasn’t retired yet. It can help considerably to have an attorney and a financial advisor on hand to assist you in valuing the assets to be split as part of a divorce. A court may even let each spouse keep his or her own retirement plan when both have substantially similar plans and both have been contributing based on their earnings throughout the term of the marriage.

Benefits of a QDRO

While it may seem as though the alternate payee in this arrangement has everything to gain, and the participant has everything to lose, a QDRO offers some notable protections for the participant:

• You can avoid the early withdrawal penalty. Federal law imposes a 10% penalty on early withdrawals from retirement plans prior to age 59.5 but makes an exception for withdrawals made pursuant to a QDRO. This means that you won’t have to pay the early-withdrawal penalty on money transferred to your ex-spouse under a QDRO.

• Your spouse will pay taxes on distributions. Benefits distributed from a retirement plan under a QDRO to a child or other dependent are treated as income to and are therefore taxable to the participant. However, you won’t be on the hook for paying taxes on that retirement money on behalf of your spouse because it will be included as income for your spouse.

• Your ex-spouse can receive benefits after your death. A QDRO can not only divert a portion of benefits to the alternate payee while the participant is alive, but it can also pay survivor benefits when the participant dies. This is useful if you want to secure the financial future of your ex-spouse.

As potential alternate payees, spouses have a legal right to obtain all the information needed about the retirement plans of the other spouse to prepare a QDRO. Contact the plan administrator to ask for certain information, including the plan description, your spouse’s benefit statements, and all associated documents. In general, the plan administrator is the person designated as such in your spouse’s retirement plan document. You can also ask for a copy of the plan’s “model” or template QDRO form they’re not all identical, and having a standard format to follow can simplify things later on.

Preparing and Submitting a QDRO Form

If you’re awarded a share of your former spouse’s retirement account, either via a court judgment or a settlement, your attorney will most likely draft the QDRO so it can be forwarded to the divorce court for a judge’s signature. The QDRO is then submitted directly to the retirement plan administrator. The order is not technically “qualified” until it’s accepted by the plan administrator. If you don’t have a lawyer, you can also use the model template given to you by the plan administrator to create a QDRO that you can submit to the court for approval and signature. Lacking either of those options, you can also fill out and print a web-based QDRO form from Fidelity or another reputable provider and submit it to the court, but it’s preferable to use the QDRO form from the plan administrator.

The QDRO form needs to contain the following types of information:
• The name and mailing address of the participant and alternate payee
• The name of the retirement plan
• The dollar amount or percentage of the assets that the payee will receive
• The number of payments and the payment time period
While the form structure may sound simple, these orders can get complicated, and the stakes can be high. A small error can cost you, your spouse, or both of you a significant amount of money. Consider hiring an attorney experienced with QDROs to prepare and submit your QDRO, even if she doesn’t handle your entire divorce.

A qualified domestic relations order (QDRO) is used in a divorce to divide the retirement, pension and other such interests of parties. Whether you actually draft QDROs yourself or refer your clients on to another attorney for the drafting of the QDRO following the signing of the decree of divorce, it is critical that you include proper language in the parties’ stipulation on divorce to enable the QDRO process to occur efficiently. Poorly drafted language in the QDRO section of a decree of divorce can often lead to expensive and time-consuming procedures for your client down the road. The following are a few simple steps to remember as you include QDRO language in stipulations drafted for your clients.

First, identify the name of the plan being divided and the person whose account it is rather than using general terms. For example, state, “Respondent has a 401(k) plan through his employer, IBM” rather than simply drafting, “The parties have acquired an interest in retirement.” Second, identify the specific method by which the account should be split. A common method in Utah is to refer to the Woodward formula, which is a formula derived from Utah case law that divides the retirement equally between the parties for all retirement earned during the marriage. The problem with using the term Woodward formula to set forth how retirement should be divided is that while some plan administrators recognize such language and will perform a split using their own in-house formulas, others will not. To be conservative, avoid using the term Woodward formula and instead state a specific percentage or dollar amount to be awarded to the non-account holding party. If you are going to use the Woodward formula, use language that provides the drafting attorney a way of implementing the Woodward formula himself such as, “The drafting attorney shall calculate the marital share owed to the non-participant party by using the months of marriage divided by total months of enrollment in the plan.”

If you do choose to use a percentage, be sure to indicate the date on which the percentage is to be calculated. Regardless of which method you choose to use, make sure to also include language regarding whether existing loans against the account should be calculated into the awardees’ share. Third, identify which party is responsible for having the QDRO drafted and provide a time limit for drafting so that if the responsible party drags his or her feet, the other party has recourse. Remember, QDROs often take three to four months to receive preliminary approval from the plan administrator, a signature from the judge and performance of the split by the plan administrator, so the time limit should not be overly burdensome. Most QDROs can be completed within six months or less. Fourth, always identify how the costs will be split for the QDRO drafting, including not just fees for drafting the QDRO, but also other fees charged by attorneys or plan administrators. It is important to include such language because while some plans are divided via QDROs, others require a similar amount of legal work to divide, but do not actually require a QDRO be drafted. Additionally, others include provisions in the plan stating that certain amounts of administrative fees will be charged to the parties by the plan administrators.

Fifth, include a provision requiring both parties to agree to cooperate and sign whatever documents necessary to perform the division of the accounts to ensure that time-consuming methods, such as filing subpoenas because the other party refuses to provide simple information regarding the account will be avoided. Finally, when dealing with military retirement, proceed cautiously. Military retirement differs significantly from dividing traditional retirement plans and if the language in the stipulation is not properly drafted, it can cause significant problems down the road in its implementation. Make sure to research the specific type of military retirement involved so the correct language is included in the stipulation or consult with an attorney who specializes in drafting QDROs.

Is There A Statute Of Limitations On Filing A QDRO?

Qualified domestic relations orders can be quite complex and you will need to ensure that a legal professional carefully reviews the marital settlement agreement that the parties entered into to ensure that you or your attorney at that time were not supposed to execute the QDRO. In addition, the attorney will need to look into the statute of limitations issue that you raise, as well as negotiate the most favorable new terms of any QDRO entered into in the event that one is found to be necessary and appropriate under the circumstances. An attorney will also help you to determine whether it is worth the cost and time of attempting to set aside that portion of the marriage settlement agreement.

Finally, they can help you figure out if it makes more sense to re-negotiate the provision related to the filing of the QDRO if it is still valid and enforceable despite your ex-wife’s failure to comply in a timely manner.