A Qualified Domestic Relations Order (QDRO) is a court order that divides a retirement plan or pension plan between two parties in a divorce. A QDRO can be a valuable tool to ensure that both parties receive their fair share of the retirement benefits that they accumulated during their marriage. However, a QDRO can also be a source of conflict and frustration if one party makes elections that ruin the other side’s interest.
One of the most common ways that a party can make elections that harm the other side’s interest is by choosing a survivor benefit option that reduces the amount of benefits that the other party will receive. A survivor benefit option is a feature of some retirement plans that allows the participant to designate a beneficiary who will continue to receive payments after the participant’s death. The survivor benefit option usually comes at a cost: the participant has to accept a lower monthly payment during his or her lifetime in order to provide for the beneficiary.
In some cases, the participant may choose a survivor benefit option that names someone other than the former spouse as the beneficiary, such as a new spouse or a child. This can be problematic for the former spouse, who may lose all or part of his or her share of the retirement benefits upon the participant’s death. For example, suppose that Bob and Alice are divorced and Bob has a pension plan that is subject to a QDRO. The QDRO states that Alice is entitled to 50% of Bob’s monthly pension payments for as long as Bob lives. However, Bob elects a survivor benefit option that names his new wife Carol as his beneficiary. This means that Bob will receive a lower monthly payment during his lifetime, and Alice will receive 50% of that reduced amount. Moreover, when Bob dies, Carol will continue to receive his full pension payment for as long as she lives, while Alice will receive nothing.
Another way that a party can make elections that harm the other side’s interest is by taking a lump sum distribution. Some pension plans will allow the participant to take a large upfront payment of his or her retirement benefits in one payment at retirement, and receive reduced monthly payments for the rest of their lives.
For example, suppose that Dan and Eve are divorced and Dan has a pension plan that is subject to a QDRO. The QDRO states that Eve is entitled to 50% of Dan’s pension payments. However, Dan’s pension has an option for a lump sum payment at retirement, with reduced monthly payouts after that, for life. This means that Dan will get more money up front, and Eve will receive her share of reduced monthly payments over his lifespan.
To prevent these scenarios from happening, it is important for both parties to communicate with each other and with their attorneys about their intentions and expectations regarding their retirement benefits. And it is essential for both parties to finalize their QDRO as soon as possible after their divorce, and to notify their plan administrators about their QDRO and any changes in their personal information. These scenarios can be prevented with proper language in both the divorce settlement and the QDRO that explicitly address survivor benefits and lump sums, so that a “bad” choice that harms the alternate payee isn’t even available to the participant.
A QDRO can be a complex and sensitive issue in a divorce, but it can also be an opportunity to secure one’s financial future. By being aware of the potential pitfalls and preparing their QDRO as quickly as possible, both parties can ensure that their retirement benefits are divided fairly and equitably. To get started on your QDRO journey, try our QDRO generator today. You can preview your documents before you pay, choose from multiple division methods, and you’ll get an editable version that can be further tweaked as necessary to protect both parties’ interests.
