What is a QDRO?

Table and wooden cubes with abbreviation QDRO Qualified Domestic Relations Order.

Your divorce settlement agreement and/or Judgment of Divorce may include these four letters: QDRO (each letter is pronounced separately, or sometimes referred to as a “quad-row”). It is short for Qualified Domestic Relations Order, and is required under Federal Law to distribute certain types of retirement funds from an employee to an employee’s spouse as a consequence of divorce. Understanding what a QDRO is, when it will be entered, and the ensuing timeline for what to expect before you receive your awarded share of your spouse’s retirement account or see your own retirement account diminish, can affect your plans for when and how you will move forward during and/or after the entry of your Judgment of Divorce. So let’s learn more about QDROs!

How Michigan Courts Deal with Retirement Assets

Michigan law requires the Court in every divorce action to address the division of retirement assets accumulated by the parties during the marriage. This includes:

  • Pension benefits
  • 401(k) and 403(b) and other similar retirement assets (including those paid by your employer)
  • IRAs
  • Stock investments that are part of a retirement plan
  • Annuities

Generally, any retirement assets accumulated prior to the marriage will be awarded to the party who earned them. However, anything earned between the date of the marriage and the date of either separation or divorce will be divided equitably.

This may sometimes be accomplished, for example when each party has an equivalent amount of retirement or one party is keeping all their retirement while the other party is keeping all the equity in the house and those values are equivalent, by allowing each party to keep the accounts in his or her own name. However, if one party doesn’t work outside the home or if the parties’ retirement assets have significantly different values, then Courts will often “equalize” the amounts each party has in retirement. This is accomplished through an order (a QDRO) that orders the plan administrator of the retirement account to transfer a percentage or set amount (which may or may not include market activity from the date of division to the date of distribution) from one spouse’s retirement account to the other spouse. This process TAKES TIME. You should not expect to receive your awarded share of retirement assets quickly! Retirement assets are not “liquid cash” and plan administrators have ample time to review and approve (or disapprove and require editions) your QDRO.

Without a QDRO, the withdrawal of retirement assets may come with an early withdrawal penalty of ten percent depending on the age of the withdrawing party. With a QDRO, that penalty can be avoided by a spouse who takes his or her awarded share as cash (except that with a pre-tax IRA, the early withdrawal penalty cannot be avoided). No matter what type of pre-tax retirement account, once either party takes out money, income taxes will be owed on the withdrawn money at the withdrawing party’s normal income tax rate.

EDRO Orders

Another type of a Domestic Relations Order (DRO) is called an Eligible Domestic Relations Order (EDRO, pronounced “Ed-row”). QDROs and EDROs are substantially similar. Which one you need depends on whether your retirement assets are a part of an employer-sponsored retirement plan controlled by the Employee Retirement Income Security Act (ERISA), or if they come from a government entity (such as a government pension). While there are technical differences, this blog addresses both types of orders under the label “QDRO.”

How a QDRO Helps Divorce Parties

As mentioned above, many retirement accounts are funded with pre-tax dollars. Employer and employee contributions are not taxed at the time the money goes into the retirement account, but are taxed at the time of distribution. Typically, the amount transferred to the non-employee spouse is a “gross” amount - meaning the non-employee spouse will pay their own taxes on the amount they receive. The QDRO enables this. Otherwise, if the employee spouse liquidated the non-employee’s share, the employee would pay the taxes on the non-employee’s share, and that is typically not the intent.

A QDRO transfers the tax liability related to the accounts from the employee spouse to the non-employee spouse. It also protects both spouses from having to pay taxes at the time of the divorce. Instead, as long as the retirement assets are transferred from one pre-tax retirement account into another pre-tax retirement account, taxes are not owed until the funds are distributed when the account holder reaches retirement age (or has a qualifying disability).

How Soon Can You Expect to Have and Use Your Newly Awarded Retirement Assets?

Although a QDRO can be entered prior to the entry of the Judgment of Divorce, most of the time, the QDRO is entered along with the Judgment of Divorce, or within a few months afterwards, depending on a number of different variables.

People often want to buy a new house, pay off credit card debt, or simply have a liquid cash nest-egg using the money from their awarded retirement assets. It is easy to mistakenly think of retirement assets like cash money in the bank. It is NOT.

The truth is that it takes TIME to get a QDRO drafted, entered, sent to the plan administrator, processed by the plan, and then distributed. It can take months and months. So do not count on having that money at the ready any time soon after your divorce to pay spousal support, child support arrearages, attorney fees, housing expenses, or debts.

If you can, you should avoid withdrawing retirement assets early (“early” usually means before age 59 1/2), otherwise you will have to pay early withdrawal penalties of 10% on top of the regular taxes on the amount withdrawn - so depending on your tax rate, you could end up forfeiting close to one-half of your proceeds to the government! If you do expect to incur early withdrawal penalties, be sure to tell your divorce attorney before you negotiate a settlement or go to trial. That way, they can advocate for a distribution that accounts for the reduced net value of the assets after the penalty applies.

How Long Does it Take to Get a QDRO Entered?

It is important to remember that QDROs, and the transfer of retirement assets, can take months after the Judgment is entered. QDROs are highly technical orders that involve very specific language and thread the needle between the Court’s equitable powers and highly regulated federal laws. Because of this, they can sometimes require multiple revisions and amendments based on the plan administrator’s need to qualify the order under the applicable federal law. Here’s what to expect:

  1. The Judgment of Divorce is entered describing the intended division of retirement assets. Often a specialized attorney will be identified to prepare the QDROs at the expense of the parties according to some negotiated percentage.
  2. The parties retain the attorney to prepare the QDROs (this may or may not be the same as one of the attorneys who represented one of the parties in the divorce)
  3. The QDRO attorney drafts the orders according to the language in the Judgment of Divorce and the federal rules and Michigan court rules.
  4. The attorney for the receiving party sends the draft orders to the plan administrator for pre-approval
  5. The plan administrator sends back to the attorneys a request for any revisions and required language based on federal law and internal policies
  6. The QDRO preparer and the parties’ attorneys resolve any issues identified by the Plan administrator about the division of the accounts
  7. The parties and their attorneys sign the QDRO and submit it to the Judge
  8. The Judge signs the QDRO
  9. The attorney for the receiving party orders a Certified Copy of the QDRO from the court clerk, which can take several days and costs a nominal additional sum
  10. The attorney for the receiving party sends the QDRO back to the plan administrator
  11. The plan administrator sends paperwork to the receiving party to select what they would like to have done with their awarded share, such as open a new account in their name and roll their awarded share into it, or roll their awarded share into an existing account, or withdraw all or part of the funds (paying the relevant penalties and taxes)
  12. The plan administrator distributes the funds as requested by the receiving party.

All these steps take time. Even after the paperwork has been completed, the plan administrator may still take months to fully execute the order. ERISA says that plan administrators have 18 months from the date the first payment is owed under a QDRO to determine if the order complies with federal law and execute the payments. This means you may not have access to the money you have been awarded for more than a year after the Judgment is entered.

Given the length of time it can take to complete a QDRO and have the funds available, it is wise to talk to your attorney about alternatives if you expect to need the money sooner rather than later. While you will be entitled to the equitable division, along with any subsequent gains or losses, as of the date described in the Judgment, you may not be able to use them for quite some time after your divorce is over. Understanding when and how you can receive those funds is essential to reaching a divorce settlement that allows you to successfully transition away from the status quo of married life.

Get Help Navigating QDROs from an Experienced Divorce Attorney

The divorce lawyers at Nichols, Sacks, Slank, Sendelbach, Buiteweg & Solomon have handled hundreds of divorces since the firm was founded in 1994. We know how to get QDROs and EDROs entered and approved by plan administrators so you can have access to your money. We will work with you and your retirement assets’ plan administrators to enforce the retirement asset provisions in your Judgment of Divorce, making sure you receive your equitable share of the family’s retirement assets. Call 724-994-3000 to schedule a consultation with one of our experienced Michigan divorce attorneys to discuss your retirement assets, and the tax and early withdrawal implications that may come from dividing it up.