The separation of assets that takes place after a divorce does not automatically extend to common retirement plans. This is what makes the qualified domestic relations order (QDRO) so important. QDROs are legal mechanisms for divvying up the income from an ordinary retirement plan - for example, an IRA, a private pension plan or a 401(k), but not government or military pensions, which are subject to different laws - with an alternate payee, most often a former spouse.
QDROs are submitted directly to retirement or pension plan administrators, who are thereby notified that a divorce is under way and that one of the parties (the payee, or spouse being divorced, in this case) is making specific claims on the plan owner's account. Ultimately, the court will decide what portion of the retirement account is fair for the payee to claim.
This can be done by filing QDRO paperwork independently or delegating a divorce lawyer to take care of the QDRO. If you are filing independently, Web sites operated by legal firms and companies like human-relations giant Hewitt Associates allow you to create forms for submission to the court. Since the stakes can be very high, it is generally a better idea to allow an experienced lawyer to handle a QDRO on your behalf, as any slip-up could result in an unfavorable outcome.
QDRO paperwork has to be filled out with great exactitude, just as you'd expect of any legal document, and the retirement plan targeted for inclusion in the marital settlement has to be covered by the Employee Retirement Income Security Act (ERISA) of 1974. Military and police pension plans, for example, are far more difficult to share after divorce, because they tend to protect the plan owner's assets until death.
If you are the divorcing spouse and are under the withdrawal age for your account, you do not have to pay an early withdrawal penalty (usually 10%) on money transferred to your ex-spouse under a QDRO. This protects the plan owner from unfairly having to pay taxes and penalties on retirement account money on behalf of the receiving spouse.
A divorcing spouse with a retirement plan and financial stability has a lot to lose via a QDRO. That's why, in some cases, the divorcing spouse may propose trading another asset (for example, a house or other investments) in place of the QDRO. The divorced spouse may also prefer to claim another asset instead of simply splitting the existing retirement plan funds. In this scenario, it's a good idea to have an open discussion with your spouse and his or her lawyer in order to learn about what means more to whom, and see if your priorities may allow you to bypass a QDRO. Having such a discussion should not preclude having meetings with lawyers and financial advisers, who can let you know if an alternatively proposed asset is substantially lower in value than a QDRO.
For divorced parties, particularly if they have no retirement plans of their own, it is seldom a bad idea to file for a QDRO; in fact, as soon as the prospect of divorce arises, a lawyer ought to be notified of the intention to file for a QDRO. The danger of waiting too long is that, if the plan owner dies without having designated the ex-spouse as the payee, the ex-spouse could be left with nothing. An ideal outcome is to initiate QDRO paperwork in the early days of the divorce so that the court can finalize the divorce and approve the QDRO at the same time.
For more information on QDRO basics, visit the U.S. Department of Labor's Employee Benefits Security Administration Web site.