Do You Need a QDRO For a 401(k)?

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QDROs are slow. The fastest QDRO I have personally done was a little more than a month between the time they retained me and the time I handed off to the retirement plan. That one was pretty much an exception — a rare miracle where both parties were cooperative, the court had zero backlog, and I was able to use the plan administrator’s own software to generate the document so we did not have to worry about pre-approval (the process where the plan administrator reviews a rough draft of the order to ensure that it will “work” once everyone has signed). On average, the good orders take about six months, and the bad ones can take years.

Given that link and the timeframe, many people wonder if they even need a QDRO for a 401k or if there is some workaround to avoid the process. After all, a 401(k) is just a cash account, right? Can’t you just withdraw half the account and hand it over? (No. Not unless you want to get taxed and penalized.) It’s a great question, but the answer is complicated. There are workarounds, but any workaround is going to come with drawbacks and potential tax liabilities that may mean you are better off taking the slow route with a proper QDRO.

Do You Need a QDRO For a 401(k)?

Generally, yes. A Qualified Domestic Relations Order (QDRO) is needed for any “qualified” retirement plan and for most state retirement plans. Qualified plans are plans that are protected by a federal law called ERISA — a lengthy, complex law that for our purposes just means extra paperwork at the end of her divorce, but also means that collectors can’t garnish your 401(k) or pension, so it has its positives. State retirement plans typically have similar state laws that carry the same protections as ERISA, so while they may not technically be “qualified” under the federal law, practically, they are similar and require a court order (a “DRO,” or domestic relations order, to split).

Can you split a 401K without a QDRO?

Yes, but speaking for your accountant, please don’t. Many people ask me if they can simply just withdraw money from their 401(k) and “pay off” their ex-spouse. That would certainly be faster, but if you do that, just like any other withdrawal from your account, you will be slapped with income taxes and an early withdrawal penalty (assuming you aren’t old enough to take penalty-free distributions, but even then, you’ll pay income taxes).

The main purpose of a QDRO is to allow you to transfer a portion of your retirement account to your ex-spouse without triggering immediate tax and early withdrawal penalties. For most ex-couples, the two parties have differing incomes, assets, and needs for retirement. One party may be looking at the next 90 days and need money today, while the other party may be focused on preserving retirement assets. Using a QDRO allows the nonemployee spouse (referred to as the “alternate payee” in the QDRO) to make the decision that is best for them — withdrawal now (and likely pay income tax, but no early withdrawal penalty since there is an exception for QDROs) or roll it over to another retirement account and preserve it for their own retirement.

What happens if a QDRO is never filed?

There are many problems with waiting to file a QDRO on a 401(k), 457, or 403B — any deferred compensation (cash and investment) qualified retirement plan. The most common problem is a loss of records. Let’s say you were divorced in 1999. I’m writing this in 2022, and yes, I do get requests for splitting retirement accounts pursuant to divorces that were that long ago — it’s ugly. In the 23 years that have passed since the divorce decree was issued, the retirement plan administrator has likely changed once or twice, and when that happens, they usually do not keep the records of the prior administrator. That means we can’t look back at 1999 and know for certain what the alternate payee’s share is worth as of that date, and by extension, we can’t add in all the wonderful things the stock market has done to that share since 1999. For people in this position, they are either going to have to come to a handshake agreement on what they think is a fair estimate of the number or hire an accountant to run educated guesses based on stock market performance and whatever old records they can find on their own. It’s an expensive, stressful process that can be avoided just by doing the order at the time of divorce.

Another very common problem is that somebody simply runs off with the money. Oftentimes, the employee’s spouse feels like they were cheated in the divorce, and they roll the money over to another account, cash it out, or just spend it on something fun. Once that happens, the parties are set up for lots of arguing in court and estimating how much money should have gone to the alternate payee — in other words, lots of expensive legal bills. Even if there is no bad intent, sometimes the employee’s spouse will simply retire and either forget (or hope the alternate payee forgets), only to have the issue creep up a couple of years later.

Speaking of retirement, I receive a few cases each year in which a party wishes to retire but is unable to do so. Their account was frozen when the plan administrator was told about the divorce. In the plan,the administrator, not wanting to later get approached by an ex-spouse with the court order demanding payment, won’t let anyone touch the account until they have either a QDRO or a signed document saying that no QDRO will be pursued. I have had people have to postpone retirement by a year or more while we clear up these types of issues.

The last common issue is death. Until a few years ago, doing a QDRO after someone had passed away was pretty close to impossible. Even now, it can be hard to predict and cost a lot, and that’s if you remember to go after the post-death nunc pro tunc (backdate) QDRO before the heirs cash out the employee-spouse’s account.

In other words, a lot of really bad things can happen in this process, which becomes exponentially more difficult, slow, and expensive if you wait to do it.

Can my ex claim my 401k years after divorce?

In most states, yes. Absolutely. The right to a portion of the 401(k) is typically written into the divorce paperwork, but many people do wait and very few states see any problem with it — a few have even issued explicit rulings that the right to retirement doesn’t “vest” (become legally enforceable) until someone actually reaches retirement age, so there is no credible argument that somebody will “wait too long” until that age has passed.

On the other hand, Kansas is one example of a state where they have explicitly issued court opinions that had some time limit (albeit a very fuzzy and lengthy one) on pursuing QDROs.

The main problem with waiting is all of the bad things mentioned above — lost records, death, delayed retirement, etc. However, the chances of a court intervening and allowing the employee to keep the entire account simply because the non-employee spouse waited too long are slim — but consult with an attorney in your state before dismissing that possibility.

Who pays taxes on 401K withdrawal in divorce?

Taxes are the biggest reason to pursue a QDRO after divorce. Many people may be tempted to try to save on legal fees, the delays, and the complexity of the QDRO process by simply orchestrating a withdrawal from the account. However, as we mentioned, there are big tax reasons why this is a bad idea – there is an immediate early withdrawal penalty for most people, plus if the employee-spouse will be taxed at their normal income tax rate.

If the 401(k) withdrawal is done via QDRO, taxes are assessed to each person when they take the money out of their retirement account. The taxes are assessed at each person’s own income tax rate — so if the non-employee spouse is a homemaker, they will typically pay less in taxes than the employee’s spouse would have, plus there are no early withdrawal penalties for the non-employee spouse when a QDRO is done correctly.

Can I draft my own QDRO

Honestly, this depends on your skill level. I have reviewed orders drafted by laypeople that accomplished exactly what they set out to do. I have reviewed orders drafted by attorneys that sacrificed thousands of dollars and subjected the parties to plenty of financial pain.

The straight answer is this: for most people, it is worth the small fee of a QDRO lawyer to ensure that your retirement accounts are split correctly — that you don’t get hit with early taxes, that you don’t give away more than you should, that you are protected if either party passes away, etc. However, there are plenty of templates available online, and for low value accounts, it may not be worth spending time and money on legal fees to split a few thousand dollars.

How long does a 401K QDRO take?

Hah! This is where a very lawyerly answer comes in: it depends.

In completely uncontested and cooperative cases, where no pre-approval is required on an order, and the court has zero backlog, I have seen as little as six weeks. Remember, the order still has to be carefully drafted, it has to be reviewed by both parties, it has to be signed, it has to be filed with the court, and then it has to be sent off to the retirement account administrator to execute the split. That’s a lot of moving pieces, even when things go perfectly.

For most people, there will be delays. Maybe the plan administrator takes a couple of extra weeks to review the draft language, or maybe one of the parties is being stubborn and doesn’t want to sign anything until somebody forces their hand. Sometimes the court gets backlogged, and I’ve even seen plan administrators lose the QDRO after it comes back from court.

For more difficult orders, the reasonable expectation might be 18 months before litigation becomes necessary. For most plan administrators, they will hold the money in the account for an average of 18 months while a QDRO is pursued. If a party is being difficult and nothing has been resolved by the end of that 18 months, it is generally a good idea to go ahead and file a motion in court to force the issue and get things in order for the plan administrator before that account is cashed out by the difficult party.

How long does it take to process a QDRO?

As discussed above, depending on how many things go wrong (in most cases something goes wrong), it can take between six weeks and 18 months for most QDROs to make their way through court. At that point, you have a certified piece of paper. In order to turn that into actual financial accounts or a big check, that certified order has to be sent to the retirement plan. Most retirement plans will then take a few months to process that order. They will typically give both parties 30 to 60 days to make any objections to how they interpreted the order. Once that appeal period has passed, the financial institution will go ahead and pull out the nonemployee spouse’s money and/or investments and either roll them over into a new account or issue a check — typically they will send a form during the appeal period to the nonemployee spouse allowing them to pick a rollover or check.

How do 401ks get split in a divorce?

Every state has different rules for dividing marital assets. For example, in some states:

  • In some states, the premarital property of each party is the separate property of that person – marriage does not affect your premarital property, in other words. Anything acquired during the marriage, including income and retirement accounts, is marital and can be divided by the courts. And anything acquired after the marriage is the separate property of the person who acquired it.
  • In other states, there is no clear line between marital and nonmarital property, especially with regards to premarital property — everything is up for grabs in the divorce, and theoretically, a judge could give your ex-spouse everything you had before the marriage.
  • In some states, there is a very strong rule or presumption that property should be split equally: 50/50. In most states, the rule is simply that the division has to be “equitable,” which means essentially whatever the parties or the judge think is fair.
  • In some states, fault in the divorce matters and can affect property division. But in most states, fault does not matter.

In other words, it would be hard, if not impossible, to tell you exactly how your 401(k) should have been split during your divorce. It is largely a matter of state law. If you are already divorced, go back and look at your settlement agreement, property orders, or final divorce papers. They should outline what property was split and who got what. Once in a while, they forget to mention retirement accounts at all — in that case, you would need to consult a lawyer on whether that retirement account is still subject to division.

In most cases, the divorce settlement will split 401(k) accounts 50/50 as of a date related to the divorce (in some states, this is the date the divorce was filed, and in other states, it might be the date the divorce was finalized). And in most states, if there was money in the account before the marriage, that amount must be separately accounted for in the division since it is the separate property of the account holder (the employee spouse).

Can I get my ex-husband or ex-wife’s 401k if they die?

Post-death QDROs are very difficult. If you can imagine all of the family law lawyers, clerks, and judges in the world, only a small percentage of these people even understand QDROs fully — that’s why QDROs are a legal niche. Then, you add a layer of complexity where one of the parties is deceased and cannot sign off on the QDRO. Plus, the deceased account holder may also have a new spouse or children who are trying to secure the funds in the account as well.

As you can imagine, it gets messy. And very few people understand the rules.

In order to enter a QDRO on an account that is in the name of a deceased person, the court has to enter that order nunc pro tunc (backdated). By backdating the order, they make the order effective as of a time when that person was actually alive. Practically speaking, if your ex-spouse has died, you should immediately provide notice of your marital claim to the retirement plan and consult with a QDRO attorney on what your best next steps are.

Who initiates a QDRO?

If your divorce was written well, it will make it clear who should start the QDRO and how the fee for the QDRO should be split. Unfortunately, most divorce agreements that we see simply say “divide the account by QDRO” and leave it at that.

The fairest arrangement is, as you might expect, for the two parties to just split the fees. But often, the account holder feels resentment over having to give up part of their 401(k) or pension and refuses to cooperate. And if the non-employee spouse waits for the employee spouse to chip in, years can go by and all of the scary things that you mentioned above (death, rollovers, loss of account records) can make this a much more difficult process.

Generally, the nonemployee spouse should consider carefully whether it is worth fighting for half of the QDRO preparation fees and potentially delaying the process, making it difficult or impossible to secure their rights to the account at all. In other words, it’s probably worth paying it all now, and hoping you get some of it back later, given that most retirement accounts are worth tens or hundreds of thousands of dollars, sometimes millions, and QDRO preparation fees can be as little as a few hundred dollars.

What retirement accounts require a QDRO?

QDROs are technically only done on “qualified” retirement plans — 401(k), 457, 401a, pensions, some 403B plans, etc. State and local retirement plans, church retirement plans, and other exempt retirement plans are not governed by federal law, but they will require something very similar: a DRO, a QILDRO, or some other state-specific acronym, all of which are really very similar to QDRO and simply have a different title.

And to continue being needlessly detailed with this explanation, federal and military plans have their own acronyms and require their own forms of court orders to split. These court orders look very similar to a QDRO, but have, again, a different title.

Do I need a QDRO to split an IRA?

No. IRA accounts are retirement accounts that were set up by federal law, but confusingly, they do not fall under the federal law that would require a QDRO. Instead, you can typically divide an IRA account with bank paperwork alone — some banks call this a “transfer incident to divorce,” some call it an “internal transfer” form, but whatever your bank or financial institution calls it, you probably do not need the services of a lawyer or the lengthy QDRO process to split your IRA account.

For contentious ex-spouses: while an IRA account does not require a QDRO, it looks a lot like one can be drafted to force the division of an IRA account. This is very handy when one party refuses to sign the bank paperwork or when a bank is too ill-informed to help you with the division and needs to be forced into action.

As you can tell after reading those 3000 words, QDROs are complex. Every divorce has a different set of facts, and every state has a different set of laws. If you are still unsure if your 401(k) needs a QDRO, feel free to reach out to our office for a free consultation via phone or online video conference, and we would be happy to answer your questions and get you started on the right path.



Willie Peacock
Author: Willie Peacock

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