The Gray Divorce Podcast: Episode 51 What You Need to Know About QDROs with Shann D. Winesett
The two main types of retirement plans divided by QDROs are 1) Defined Contribution Plans (DC plans) such as 401(k)s and 2) Defined Benefit Plans (DB plans) or pensions.
Common QDRO errors include:
Using the same language to divide the different types of plans.
Pension plans are divided by a coverture fraction, also known as the “time rule.” The numerator is the number of years the spouse was married while participating in the plan, and the denominator is the total number of years the spouse has been in the plan. The time rule should never be used to divide defined contribution plans as it could result in unintentional windfalls for one party.
Attempting to divide non-divisible plans
The “qualified” in QDRO refers to whether the plan is governed under a federal law known as ERISA (the Employee Retirement Income Security Act). Note that IRAs are not considered qualified plans and do not require a QDRO.
Note: Distributions from an IRA prior to age 59 1/2 are usually considered an early distribution and subject to a 10 percent penalty in addition to ordinary income tax. A transfer of the qualified retirement plan like a 401k (or a portion of it) to a spouse as part of a divorce settlement pursuant to a QDRO is exempt from this rule. So, if you're receiving a portion of your spouse’s 401K and need to take a distribution, do it before you roll it into your IRA.
Failure to address loans when dividing a defined contribution plan
Most DC plans consider a loan as an asset of the account, not a debt. If a participant has taken a loan against the plan, you and your attorney should know how that loan will be treated in the account’s division.
Failure to address gains and loss when dividing DC plans
The longer the period between the entry of the decree and the division of the retirement funds, the greater the likelihood of gains or losses in the retirement account. The divorce settlement must address what happens to earnings and losses awarded to a spouse between the date of division and actual payment.
Failure to address survivor benefits in pensions
It's important to determine if the participant already made an election regarding survivor benefits that's irrevocable.
Is there an option for a separate interest QDRO? A separate interest splits the plan balance between the participant and the alternate payee before payments have begun. It allows the non-participant spouse to have their own pension benefit completely independent from the participant.
Logistical Issues
Who's responsible for drafting the QDRO?
Once the divorce is finalized, the QDRO needs to be implemented.