Pension and retirement benefits earned during a couple’s marriage are of great value. It’s not uncommon for couple’s that have been married for a long-time to build up significant pension or retirement benefits, which can be worth considerable value in their marital assets. When splitting up these assets a Qualified Domestic Relations Order (QDRO) will be needed to receive all or a portion of qualified plan benefits from an ex-spouse.

Typical plans that can be divided by a QDRO include defined contribution plans such as 401(k) s, and defined benefit pension plans. For the order to become “qualified” it must be reviewed and approved by the employer’s plan administrator. Until this happens it is just an order and can’t be legally enforced.

Since no two pension/retirement plans are identical determining the participant’s specific entitlements under the Plan are critical. This can be accomplished by asking the Plan Administrator for a copy of the summary plan description, which will detail all the specifics of the Plan. Defined contribution plans are very easy to value because they issue monthly or quarterly statements that show the actual cash value of the account. Defined benefit plans, which pay a specific monthly benefit at retirement and have no current cash value, can be quite challenging to assess. This is because the value of the future benefit needs to be calculated as a present value today. The value of this future benefit is based upon many factors such as years of service, average compensation, age at retirement, etc. and each Plan has a specific formula for how they determine these benefits.

It is critical to obtain all the benefit information and correct valuation of any retirement assets during the negotiation process so that assets are not overlooked and valuable pension benefits are not lost. Once the specific benefits have been determined specific issues to include in the QDRO need to be addressed such as:

• When will payments begin, how will they be made, and how long will they last?
• What happens if the participant opts for early retirement?
• What happens if the participant dies either before benefits begin or while benefits are being paid out?
• What happens if the alternate payee dies either before benefits begin or while benefits are being paid out?

It is extremely important that the order be drafted correctly or a spouse may not be able to collect their portion of the plan benefits. It is a good idea to have the order pre-approved by the Plan Administrator before it’s filed with the Court. This way the parties can find out if the language and provisions included meet the Plan’s approval. If this is not done and the Plan rejects an order already signed by the court, the order will have to be amended, re-filed and re-approved. Not only will this waste valuable time and additional processing and legal fees, but also the delay could result in a loss of benefits. If the participant dies, quits, gets fired or retires from their job, or remarries before the QDRO gets implemented the non-participant spouse could potentially lose all their benefits.

In the case of defined benefit plans, QDRO preparation can take between two to four months, depending on the plan, and can be costly. However, using a QDRO is not the only way to divide these types of benefits. Other marital assets can be used to compensate for the value of a qualified retirement plan. The parties may agree to an award of non-retirement assets, IRA’s or cash to cover the value of the pension benefit.

QDRO’s are complex legal documents therefore it is vital that they be properly drafted to protect the rights of both parties. Because there are so many important issues to consider it is essential to work with an attorney, certified divorce financial analyst or other professional who is skilled in properly preparing these documents. The smallest mistakes in language could cost thousands of dollars in lost benefit payments.

For more info: View Part 1 of this series:  Qualified Domestic Relations Order - What is a QDRO? 

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