A QDRO is a legal tool to divide certain assets in divorce. Learn how QDROs work and how to obtain one with EP Wealth financial advisor Kathy Costas. Advisors available nationwide.

What Is a QDRO?

A Qualified Domestic Relations Order (QDRO) is a legal document that recognizes that a spouse, former spouse, or other dependent (known as the alternate payee) is entitled to a predetermined portion of a participant’s asset plan. Because QDROs are fairly complex, it’s important to note the pros and cons to determine if this option is right for you.

Assets That May Qualify for a QDRO

While QDROs are typically associated with retirement accounts, they can actually be used to divide a variety of plans, including:

• 401(k)s
• 403(b)s
• Defined benefit plans
• Profit sharing plans
• Stock options
• Bonuses
• Deferred compensation

To use a QDRO, the plan must qualify for certain tax treatments under Employee Retirement Income Security Act of 1974 (ERISA.) ERISA is a federal law that regulates employer-sponsored benefit plans to protect workers’ retirement assets.

As a CDFA^® (Certified Divorce Financial Analyst)^® I review my client's assets to determine if they qualify for a QDRO.

Tax Implications of a QDRO

One of the primary benefits of a QDRO is that it can assist participants and payees in mitigating potential tax consequences during asset division. Essentially, it’s a transition where the recipient is stepping into the shoes of the account owner.

Unlike other assets that may be taxed when divided, funds divided with a QDRO are not taxed. However, if you take money out of a qualified plan in the future, you will be taxed on those withdrawals.

An Overview of the QRDO Process

Preparing a QDRO takes several steps and the assistance of an attorney who specializes in filing them. Here’s a brief rundown of the process.

Once I’ve reviewed my clients’ plans and confirmed they qualify for a QDRO, their attorney begins drafting the document. This document lists the percentage of the participants’ benefits that the payee will receive and breaks down exactly how they arrived at this number. This involves a formula that takes into account the length of the marriage, amount of time the spouse was a participant in the plan, and the value of the account.

I remind my clients and their attorneys to incorporate verbiage in the QDRO to reflect any gains or losses that occur from the date of separation. Because these funds are usually invested, they are subject to market fluctuations—for better or worse. Both spouses should equally benefit (or weather) any changes in value from the time they separate until the accounts are divided.

Next, the draft of the QDRO is sent to the plan administrator for their approval. Once that approval is given, the document is then signed by the parties, and it’s sent to court. From there, it’s stamped by the courts and returned to the attorney. The attorney submits the signed and stamped QDRO to the plan and from there, the funds are divided.

THINGS TO CONSIDER

During divorce, my clients and I explore different approaches to dividing assets while aiming to retain their value and potentially mitigate the tax liability. As I mentioned, one of the main benefits of a QDRO is that it is not taxed as long as the funds are transferred to a retirement account.

However, a QDRO can be more involved than other methods of dividing retirement accounts. They require some reporting to the IRS, and there are time and money costs associated with that process.

At a minimum, it can take a few months to complete. But I have also seen some take years. I want my clients to understand they will not have access to these funds for a while if they are using a QDRO. So if that’s a concern, we can discuss alternatives if possible.

Also, you need to hire an attorney who specializes in the preparation of QDROs to assist with the process. With attorneys fees, a QDRO can cost anywhere from $1,500 – $2,000 on average. That’s important to consider, especially when multiple QDROs are part of the divorce settlement.

A QDRO can be a solution for some couples, and is the only way to divide assets that are held in a  qualified plan, ie. a 401K, 403b, pension etc., but there may be other ways to divide assets that are not part of an ERISA qualified plan such as an IRA, so that the time and expense of a QDRO is not required. Every client’s situation is unique and requires a customized approach to financial planning during a divorce. 

While divorce can be challenging, it’s incredibly rewarding to be in a position to support and guide couples as they navigate this chapter of their lives.

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