When I draft QDROs in a Texas divorce, one of the parties hires me to draft the QDRO after the judge signs the divorce decree. This is usually not the most efficient or productive method to deal with the QDRO. It is far better to start thinking about the QDRO early in the divorce. Many of the problems with QDROs relate to waiting to start thinking about the QDRO until the divorce is final.
Many of my QDRO clients did not have an attorney in their divorce. They often did not know a QDRO was necessary until the plan administrator for the 401k, 403b, or other retirement plan declined to divide the account based solely upon the divorce decree. I do have a number of clients who I drafted QDROs for but had attorneys in their divorce. For whatever reason, the divorce attorney did not draft the QDRO or did not discuss the QDRO earlier.
Many divorce attorneys do not draft QDROs due to the technical specifications. They do not think about having to deal with the QDRO during the divorce. This is one reason why I believe anybody getting a divorce in which a retirement plan is an issue should hire a divorce attorney with expertise in QDRO drafting or ensure that their divorce attorney works closely with another divorce lawyer with QDRO expertise. Today’s post will discuss some of the problems involved with waiting to start the QDRO until after the divorce.
1. QDROs involve a lengthy process.
On average a QDRO takes months to divide a retirement plan even when everything goes right. It can take considerably longer if there are problems or disputes along the way. Most people want to resolve their divorce as soon as possible; having this lingering property issue can be a real hang up. By drafting the QDRO with the divorce decree and getting all the attorneys to sign the QDRO can trim weeks to months off.
It can take time to obtain the plan’s QDRO guidelines, draft the proposed QDRO and hammer out the language. Doing that simultaneously with the divorce avoids the additional delay with waiting until after the divorce to start collecting information and negotiating language. Many plan administrators will review proposed orders before the judge signs it. This can occur while negotiating and finalizing the divorce to further reduce the post-divorce delay in completing the QDRO process.
2. By agreeing to the QDRO language at the same time as the divorce decree you can get one agreement and be done.
One problem that arises in a divorce is that the parties will reach an agreement but after the divorce one or both ex-spouses gets buyer’s remorse. Then it becomes more difficult to bring the parties back to an agreement on the QDRO language.
3. The divorce decree language about the retirement plan needs to specify the way the plan benefits will be divided and include language to enforce completion of the QDRO process.
In almost every pro se divorce decree I have seen, and many drafted by divorce attorneys, there is insufficient explanation of how the QDRO should divide the plan benefits and little to no language requiring the parties to cooperate in the QDRO process. Inclusion of clear instructions helps prevent disputes over the QDRO. It is easier to hammer out a QDRO if there is a a clear decree to follow.
4. It saves additional court fees.
Most Texas divorce courts charge an additional fee to present a domestic relations order to the court for the judge’s signature if it has been more than thirty days after the divorce decree. The fee ranges from $30 to over $300. There is little reason to pay the court for something you could have obtained for free.
5. If the DRO cannot be qualified because the division ordered in the divorce decree cannot be performed by the plan administrator then you are in for a messy revision of your divorce.
In your divorce the divorce decree will identify in some way how to divide plan benefits. You will clarify the division in the domestic relations order the judge signs. The signed order goes to the plan administrator who determines whether the order is “qualified” and can divide plan benefits. An order is qualified and becomes a QDRO when it meets the plan rules and all of the requirements in ERISA for an ERISA-qualified plan. (ERISA is the federal law governing private employer retirement plans.) If the order is not qualified then you must fix the order, have it resigned and sent to the administrator.
However, if the order cannot be qualified because the division of benefits in the divorce decree is not permitted under the plan rules then the only remedies for the parties are to either satisfy the division of property in the decree by some other means (such as making payment out of other financial assets) or amend the divorce decree and then have a new QDRO drafted and signed. This is a really bad process. There is a small amount of time to amend the divorce decree and it can create a lot of problems reaching a new agreement on the property division.
You may have to start all over with dividing property to reach a new agreement between the parties. This is a key reason why your divorce attorney should understand the plan.
6. Figuring out whether the retirement plan needs to be divided and whether a QDRO is necessary early in the property division can save time and money.
Retirement savings normally represent the largest piece of the property division in a divorce. It’s easy to want to carve up those benefits but it is not always the best course of action. There are a number of financial and tax considerations when dividing retirement savings. It may not be financially beneficial to divide retirement plan benefits, particularly where other assets are available. In those cases you can save the costs of a QDRO.
On the other hand, sometimes people think the retirement savings should remain undivided. Then they find out down the road that there isn’t a fair division without dividing the retirement benefits. Sorting out property issues early on with an attorney with expertise with retirement benefits can help move the property division.
If you are about to file for divorce you should be aware of the potential need for a QDRO. Get in contact with an attorney with QDRO expertise to help you with your divorce.