Ensure a seamless division of retirement benefits in divorce or legal separation with a well-crafted qualified domestic relations order (QDRO). This essential legal document provides instructions to retirement plan administrators for distributing participant benefits accurately. However, the intricate nature of a QDRO demands meticulous attention to detail. Mishandling it can lead to costly errors, delays, disputes, and unfavorable tax outcomes for all parties involved. Let us guide you through the complexities of QDRO drafting to ensure a smooth and fair resolution of retirement assets.
In this blog post, we will discuss some of the common mistakes that people make when drafting a QDRO and how to avoid them.
Mistake #1: Not following the plan’s requirements.
Each retirement plan has its own rules and procedures for accepting and processing QDROs. Some plans may have specific forms, language, or information that they require in a QDRO. Others may have limitations or restrictions on how benefits can be divided or paid out. On our templates, we have written the language to be versatile so that most private plans will accept the language, including conditional “if” clauses that apply only when needed by the plan. Even still, we recommend that users send their draft to the plan for pre-approval (a review by the plan administrator to see if the order would be acceptable if a court entered it) before they sign it and file it with the court. The plan admin may have input or edits that they require, which is totally normal, before the draft order is acceptable to the plan.
Mistake #2: Not specifying the type and amount of benefits.
A QDRO must clearly identify the type and amount of benefits that are being assigned to the alternate payee (the spouse or former spouse who is receiving a portion of the participant’s benefits). There are different types of benefits that may be available under a retirement plan, such as defined benefit plans (pensions), defined contribution plans (401(k)s), profit-sharing plans, employee stock ownership plans (ESOPs), etc. Each type of benefit may have different valuation methods, payment options, and tax implications.
A QDRO must specify which type of benefit is being divided and how it is being valued (e.g., as of a certain date, using a certain formula, etc.). A QDRO must also specify how much of the benefit is being assigned to the alternate payee (e.g., a percentage, a dollar amount, a fraction, etc.). A QDRO must also indicate when and how the benefit will be paid to the alternate payee (e.g., in a lump sum, in monthly installments, at retirement age, etc.). A QDRO must also address any contingencies or adjustments that may affect the benefit amount or payment (e.g., cost-of-living increases, early retirement subsidies, survivor benefits, etc.). Failing to specify the type and amount of benefits can lead to ambiguity, confusion, or disputes over the interpretation and implementation of the QDRO.
Our versatile drafting software allows you to pick the division method that most closely matches your divorce settlement terms.
Mistake #3: Not coordinating with other divorce documents.
A QDRO is not a standalone document. It is part of the overall divorce settlement agreement that may include other documents such as a marital property agreement, a spousal support order, a child support order, etc. A QDRO must be consistent with and complementary to these other documents. For example, if the marital property agreement states that one spouse is entitled to 50% of the other spouse’s 401(k) account as of a certain date, then the QDRO must reflect that same division and valuation date. Failing to coordinate with other divorce documents can lead to inconsistencies, conflicts, or double-dipping of benefits. Some courts, such as those in New York City, actually require parties to submit their divorce settlement and judgment to the court alongside the QDRO to allow the clerks and judges to easily ensure that the QDRO matches the divorce.
To avoid these common mistakes when drafting a QDRO, it is crucial to carefully draft your order using well-tested templates, such as those that power our drafting software. Remember, proper preparation and attention to detail in QDRO drafting are essential to secure a smooth and favorable resolution of your divorce or legal separation. If you’re looking to draft a QDRO, give our software a try – you can preview your documents before paying and we offer a money-back guarantee if you are unsatisfied with your draft QDRO. Get started today!
