A Qualified Domestic Relations Order (QDRO) is already complicated enough. Somehow, after parties grind their way through a divorce, they are told that they have to now get a specialty court order after the divorce just to divide retirement accounts. And that court order has to delicately balance federal and state law, with the parties’ divorce agreement, to fairly divide hypothetical retirement benefits that nobody – not the divorce lawyer, not most parties, not even some of the retirement plan administrators themselves – really fully understands.
How do you take that complicated document and make the problem even worse? By waiting until after one of the parties dies. Most QDROs are done with the signatures of both parties, while they are alive, and the QDRO itself addresses issues like the death of either person, but when the QDRO is still on the “to do” list when one of the parties dies, the process for drafting, filing, and executing the QDRO becomes immensely more complicated and expensive. It essentially boils down to a backdated court order, brought via motion to the court, to try to claw back as much of the surviving party’s rights as possible.
In this article, we’ll explore some of the issues that can arise in this situation and what steps need to be taken to ensure a fair distribution of assets.
The Importance of Timing
When it comes to dividing retirement accounts, timing is everything. A QDRO is a legal document that outlines how retirement benefits will be divided between the parties in a divorce settlement. It is important to draft and enter the QDRO before the death of either party, as this can have significant implications for the distribution of assets.
If one party dies before the QDRO is entered, the distribution of retirement benefits may be subject to the terms of the plan. This may mean zero benefits for a surviving spouse of an employee if no survivor benefits were elected or available under the plan or if those benefits were reserved to a new spouse or to another ex-spouse under the terms of another QDRO. It could also mean no benefits for the surviving spouse if a cash-based retirement account, such as a 401(k), is paid out before the surviving spouse makes a claim on the account.
When The Employee (Participant) Dies
When the participant dies first, it can leave the alternate payee (non-employee surviving spouse) in a real mess. For pensions, the payments are intended to last for the life of the participant. Obviously, if that life ends, the payments end too, right? While there is some truth to that, most plans also have survivor benefits available – both pre-retirement and post-retirement. Those benefits, however, have to be assigned to the surviving ex-spouse to take effect.
How are survivor benefits assigned? Through a QDRO, of course. The QDRO can name the ex-spouse as the beneficiary for both pre-retirement and post-retirement benefits. However, if the participant has already died, the surviving spouse will need to work with the plan to see if a “nunc pro tunc” (a funny latin expression that means backdated) order will suffice to “restore” these benefits to the surviving spouse. As an alternative, a backdated “separate interest” QDRO may be able to carve out the alternate payee’s share of the pension and peg that pension the lifespan of the alternate payee – guaranteeing payments for the surviving spouse’s life.
As for 401(k) plans and other cash-based deferred compensation accounts, the remedy is a little more straightforward: a backdated QDRO with a dollar amount, percent, or formula for determining the respective interests in the plan.
All of these solutions are pretty dependent on moving fast and working with a cooperative plan administrator. For people facing this issue, consulting with an attorney is the best bet, as you’ll have to file a motion with the court to backdate the order, work with the plan to determine options on dividing the retirement plan, and do so before any benefits are paid out to another surviving family member or otherwise disposed of. In the meantime, while the surviving spouse is looking for an attorney, he or she may want to consider sending a letter with a copy of the divorce agreement to the plan in order to put them on notice of their rights to benefits and impending legal action. In many cases, the plan will “freeze” the benefits until a QDRO can be entered.
When the Alternate Payee Dies
When the alternate payee dies before the participant, this can seem like a windfall for the participant. In many cases, it actually is. After all, if the ex-spouse dies and the plan doesn’t know about the divorce, there’s a good chance that nobody will show up to claim the money.
Where problems arise is when someone has put the plan on notice of the divorce, either through a formal mechanism (a “notice of adverse interest” or a California-specific joinder on the plan) or simply through a letter to the plan advising them of the divorce. It’s also not unheard of for a plan to simply flag a file at retirement because an employee-participant had a married name at one point of their career and has a different name at retirement.
When a plan is put on notice of the divorce, nearly all of them will do one of two things: put an eighteen-month hold on the funds or put an indefinite hold on the funds. The eighteen-month hold goes back to federal law and is basically there to give the parties time to handle the QDRO. Once the eighteen months is up, the plan will release the hold and allow the employee spouse to do as they wish with the funds. For the relatively rare plans that do indefinite holds (typically government plans, though some unions and private plans will as well), they will not release any funds until a QDRO is entered or a waiver is signed. A few plans may also allow the employee-spouse to draw a partial benefit.
If your plan is frozen and your ex-spouse has passed away, discuss the length of the hold and the plan’s requirements to release the hold with the plan administrator. It is likely that they are simply covering themselves from legal claims and their requirements may vary on what they need to release the funds. Some will only ask for a copy of the death certificate, while others may well require a full backdated QDRO.
What’s The Retirement Plan Remedy to a Deceased Spouse?
If one party dies before the QDRO is entered, it is important to seek legal advice as soon as possible and to reach out to the retirement plan for their requirements. Depending on the circumstances and plan’s policies, there may be options for resolving the issue and ensuring a fair distribution of assets.
Some plans simply want a death certificate, especially if it is the alternate payee who has passed. Once they know that nobody is coming for the funds, they will release them to the surviving spouse.
Still more plans simply want to wait out a reasonable time for any claims to come in (eighteen months is common) and then they will distribute the assets.
The next least-complicated solution is a QDRO waiver. This is a formalized waiver of any interest in the retirement plan. We’ve seen success where the heir of the deceased spouse (typically a child of the divorced parties) signs off on the waiver and a death certificate is attached as proof that the heir has the right to sign the waiver. This wavier, typically filed with the court as an agreement between the surviving party and the heir as part of the divorce case, restores the employee-spouse’s right to the funds.
The most complicated solution is a “nunc pro tunc” (backdated) QDRO. For decades, these didn’t even really exist – the right to a QDRO died with the party. However, in recent years, courts across the country have been increasingly willing to enter a backdated order to divide retirement benefits, assuming a motion is brought quickly and there were clear benefits at stake before the death. Every court and state is different, so for folks staring down this road, they’ll want to hire the most experienced local family law attorney they can find and perhaps ask that attorney to bring in a QDRO consultant or co-counsel as well.
The Simplest Answer is to Not Wait
The death of one party before the QDRO is entered can have significant implications for the distribution of retirement benefits in a divorce settlement. If a party has already died, it is important to seek legal advice as soon as possible to ensure that your rights are protected and a fair distribution of assets is achieved. However, if both parties are alive and, perhaps one has a health condition, it is important to proceed with the QDRO as soon as possible to lock in benefits in case the worst happens.
If you are in need of a QDRO draft, check out our QDRO generator, which allows you to draft an order in minutes, preview the document before you pay, and download an editable version of the order in case further edits (such as nunc pro tunc language or waiver language) is needed.
