by Natalie Greaves
It is sometimes said that family law attorneys have the best stories, and that might be true. What other attorneys can share stories of litigants gluing drawers together prior to transferring property, arguing over dishes and collectible dolls, and having trial testimony about dead turtles?[i] The stories range from the ridiculous to the heartbreaking. It is also true that family law attorneys also often deal with an extremely high case load, multiple required filings, and court appearances in every case, and emotionally charged litigants who are trusting their attorneys to help in the most difficult time in their lives. Attorneys who do not practice family law might also be surprised by the highly varied, complex, and high dollar assets and issues that come across a family law attorney’s desk all day long every day. One of those issues involves dividing retirement assets in a divorce.
A Qualified Domestic Relations Order, or QDRO (pronounced “kwä-drō”), is a court order for division of certain retirement assets in divorce. It is the only allowable method of assigning applicable retirement assets to a person that is not the participant in the account, and if done correctly, is an exception to the rule that removing retirement assets will create a penalty and taxable income.[ii] It has two primary functions: 1) it tells a retirement plan administrator how to divide the asset; and 2) it provides basic identifying information about the plan and the parties.
For many individuals, retirement benefits may meet or even exceed the net equity value of the community home as the largest single asset to be divided in divorce. This is particularly true with the changing demographic of divorce litigants. According to data from the U.S. Census Bureau in a report issued in 2021,[iii] divorce rates for people over 50 have doubled since 1990 and tripled for those over 65. In 2021, 34.9% of all Americans who got divorced in the previous calendar year were aged 55 or older-twice the rate of any other age group. These individuals have had many more years to accumulate retirement assets that must be divided in an equitable manner.
There are many kinds of retirement assets. A defined contribution plan is a 401(k), 403(b), or similar plan. These plans have a particular dollar value and a QDRO for this kind of account results in a one-time event that segregates the account into two. A defined benefit plan, also known as a pension plan, results in monthly benefits calculated by actuaries based upon a person’s life expectancy paid out as annuities.
Typically, other retirement assets such as Individual Retirement Accounts do not require QDROs, as the plan participant should be able to simply initiate a request called a “transfer incident to divorce” that sends the correct portion to the former spouse’s new or existing IRA. However, plan administrators sometimes still request division orders for these accounts for their record-keeping. Other assets subject to division such as military retirement, Thrift Savings Plan accounts, and Federal Employees Retirement System accounts utilize different terminology for the caption of the division order, the naming of the parties, and substantive requirements for the orders which are beyond the scope of this article.
To be a valid QDRO, the order must meet specific criteria. The person named on the account is called the “participant.” The former spouse that receives a portion of the participant’s account is typically called an “alternate payee.” A QDRO directs the plan administrator of the account to pay a certain amount or percentage of the account directly to the alternate payee by segregating his or her portion into a separate account from the participant’s funds.[iv] The alternate payee can choose to keep the account with the same plan administrator, or they can roll it over to a preexisting account or a new account. This allows the alternate payee to adopt his or her own investment strategy and avoid continued direct involvement with the participant about the asset.
Dividing a retirement asset is not the only use for a QDRO. Though certainly more rare, other acceptable uses include pre-divorce judgments for support and attorneys’ fees, post-divorce spousal maintenance (including separate contracts for maintenance not included in a Decree),[v] related attorneys’ fees,[vi] child support orders not merged into a final divorce decree, or child support arrearages.[vii]
There are some inherent limitations in QDROs as well. A QDRO cannot determine how federal taxes are to be paid, meaning that even if a QDRO were to state that the participant was to keep the federal tax liability for amounts assigned to the alternate payee, doing so would be invalid under section 402 of the IRS code.[viii] A workaround for this issue would be to instead require reimbursement of any taxes paid in the divorce decree as a way to limit the tax impact on the alternate payee.
Another limitation of a QDRO is procrastination often creates further litigation. Consider the following examples. First, the United States Supreme Court ruled in Boggs v. Boggs that ERISA preempted state law to protect an alternate payee’s interest from a deceased participant’s testamentary heirs, even though a QDRO had not yet been entered.[ix] The Court found that QDRO rules in this case meant that a testamentary transfer would be an ERISA-prohibited alienation. Next, a Ninth Circuit case, Ablamis v. Roper,[x] dealt with the death of the alternative payee and held that the nonemployee spouse could not validly bequeath her portion of the surviving employee’s pension benefits to a third party under California’s community property law.
Though there are only a handful of reported Idaho cases regarding QDROs, one case involved a Decree that awarded one half of a 401(k) account to an alternate payee.[xi] Between the date of divorce and the date that the QDRO was entered, the value as found at the time of divorce had dropped precipitously. The Decree stated that the alternate payee was assigned 50% of the 401(k) value “as of the date of divorce.”[xii] The drafted QDRO had similar language, but also had a separate provision in the QDRO that stated that if the “aggregate amount of benefits . . . is reduced, any such reduction shall be shared by the parties on a pro rata basis.”[xiii] The Court affirmed both the Magistrate and District Courts, finding that the reduction paragraph did not specifically refer to gains and losses based on market fluctuations, and also finding that the Decree was clear as to the date of valuation.[xiv] The Court did agree with the District Court’s ruling that the Magistrate Court could not require the participant to pay the difference from other funds, but only through the further division of the 401(k), even though it resulted in him receiving less than half of the actual account value at the time of the division.[xv] The Court specifically rejected the argument from the participant that doing so would be considered an unequal division.
After the entry of the Decree, a draft QDRO should be completed. To do so, a signed release of information form will likely need to be obtained from the participant to receive necessary specifics from the plan administrator. If the practitioner is not familiar with the plan or plan administrator, it is often advisable to request preapproval, although some plan administrators will refuse. If preapproval review is available as an option, this should be done prior to having the Court sign the QDRO to avoid having the Court need to sign multiple QDROs if there are corrections to be made which can be frustrating and time-consuming for all involved. The plan administrator may require changes to be made which must be reviewed carefully to ensure that the QDRO is not being interpreted incorrectly, especially for mixed separate and community assets as occurs when some of the account was earned prior to marriage. Most judges will require a signed stipulation when submitting the QDRO, even if the Decree states the division and the Decree was entered by stipulation. his is with good reason, as a drafted QDRO can sometimes not match the intention of the parties if it is not properly reviewed. Once the Court signs the QDRO, a copy along with a certified copy of the Decree should be sent to the plan administrator to effectuate the division.
Best Practices for QDRO Language in a Decree
Whether a family law practitioner intends to draft the QDRO herself, or seek outside counsel to handle the drafting, certain language should be present in the Decree to avoid confusion and unintended consequences.[xvi] First, the Decree should state who is drafting the QDRO, either by naming one of the litigant’s divorce counsel, or by designating a neutral outside counsel to effectuate the intentions of the Decree. Neutral counsel can be helpful when distrust is high between litigants or simply when practitioners are busy with other deadlines and cases. The Decree should also state that the Court will reserve jurisdiction until the division is complete.
Second, the Decree should be specific in naming which accounts are to be divided. If there are premarital retirement accounts or accounts that are simply not going to be divided even if they are community, it is still important to name each of these in the Decree. The naming of the accounts in the Decree should be specific enough that a person not involved in the case can identify them.[xvii] At a minimum, the plan administrator will review the Decree and compare it to the QDRO and there should be enough specificity to avoid confusion. Particularly if there are multiple accounts with the same plan administrator, this may create an avoidable issue. Avoid simply referring to a property and debt schedule and instead list these accounts directly in the Decree, even if they are also listed in the schedule.
Specificity is also required in designating what portion of the account is assigned to each party. This can typically be either a dollar figure or a percentage. A mixture of the two could potentially be possible if written correctly, but this is more rare and more difficult to determine the order of operations and designations, which can result in rejection by the plan administrator and likely create an unnecessary headache when there would be a better way to word a QDRO or do the division.
The Decree should also state who is paying for the QDRO division costs and include a deadline for payment upon request and for requested signatures. This should not state when the QDRO will be completed, as the plan administrators vary greatly in how long they take to process a QDRO but should instead only have dates that are within the control of the parties. Regarding cost, some plans are now passing on division costs to participants and alternate payees. This amount can vary and is deducted from the amount awarded to each party absent some other designation in the Decree. It is rare to know this until after the Decree is already entered, but preemptive language could be added if one party is going to be assigned this cost if it occurs.
Additionally, the Decree should state how gains and losses subsequent to the Decree are to be handled and whether only one party will be bearing this risk or whether the parties are subject to these in pro rata or in some other manner.
Finally, depending on the type of retirement asset, survivor benefits may be available to a former spouse. Sometimes these have a cost that lowers the amount that both parties will receive and sometimes there is no cost.[xviii] This is only an issue for pension accounts and defined benefit plans, rather than defined contribution plans, but should still be considered in Decree drafting. For defined contribution plans, language should be included as to what will happen if either party passes away prior to the division being final. For example, consider a case where an alternate payee dies post-divorce but prior to division. The issue might become whether her heirs are entitled to receive her portion of the former spouse’s 401(k) awarded to her in the divorce or whether her portion reverts to the former spouse since the division had not occurred. Having specific language that had been stipulated to by the parties prior to the divorce might help avoid this even being an issue that would need to be decided.
Though I do many referral cases with one or two divorce counsels of record who want to have a neutral attorney handle the QDRO based on complexity or convenience, many of my QDRO cases are to fix issues that have already occurred, or QDROs that simply have never been completed, including one current case with a Decree from 2003. There is good reason for this, as both the attorneys and litigants often feel that the case is over and tying up the loose ends of completing the QDRO is low on the list of priorities. At other times, the Decree is not stale, but either lacks the necessary language, or the intention of the parties is not something that can be accomplished by the plan administrator. Sometimes a drafted and entered QDRO is just simply incorrect, which the parties do not realize until after the division occurs. Though QDROs are likely not as exciting as other aspects of family law, they are incredibly important to complete correctly and in a timely manner to help preserve and protect client rights. As a practitioner, having a QDRO become an exciting part of the litigation is probably something that is best avoided by establishing a system of best practices for dividing these assets.
Natalie Greaves is the managing attorney at Boise Law Group, PLLC, and is licensed in Idaho and Arizona. Natalie provides QDRO services directly to clients as well working as a neutral QDRO attorney for other litigators who wish to outsource QDRO preparation. She also practices family law litigation and is a Supreme Court Certified Child Custody Mediator. For fun, she travels the world but especially prioritizes visiting any locations occupied by her family.
[i] Reading this footnote means that you want to know if these are true stories. Yes, unfortunately.
[ii] Qualified Domestic Relations Orders are anticipated by Section 206(d)(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and Section 414(p) of the Internal Revenue Code of 1986, as amended.
[iii] Number, Timing, and Duration of Marriages and Divorces: 2016 Current Population Reports By Yerís Mayol-García, Benjamin Gurrentz, and Rose M. Kreider Issued April 2021 P70-167.
[iv] For pension accounts, it is a little more complicated and the accounts are not necessarily segregated based on factors such as whether the employee has begun receiving benefits or whether there is a prior spouse.
[v] Kesting v. Kesting, 160 Idaho 214, 370 P.3d 729, 733 (2016) (“We conclude that the provisions of Title 11 of the Idaho Code that provide for attachment of exempt property to enforce claims for support are part of Idaho’s domestic relations law.”)
[vi] Boggs v. Boggs, 520 U.S. 833, 841, 117 S.Ct. 1754, 138 L.Ed.2d 45 (1997).
[vii] 29 U.S.C. § 1056.
[viii] See e.g., Clawson v. Commissioner, T.C. Memo 1996-446 (1996).
[ix] Boggs, 520 U.S. at 841.
[x] Ablamis v. Roper, 937 F.2d 1450 (9th Cir. 1991).
[xi] Grecian v. Grecian, 140 Idaho 601, 603, 97 P.3d 468, 470 (Ct. App. 2004).
[xiii] Id. at 603-604, 97 P.3d at 470-471.
[xiv] Id. at 604, 97 P.3d at 471.
[xvi] A stand-alone document is not required to be a QDRO. Instead, it could be any judgment, decree, or order”, including a divorce decree. However, the plan administrator has wide leeway in determining whether a document meets their requirements, and it is likely much easier and more efficient to present the information in a way that they expect to receive it.
[xvii] For example, rather than including only the designation of “401(k) account” in the Decree, it is preferable to say, “Fidelity 401(k) account” or better yet, include a few of the final digits of the account number, such as “Fidelity 401(k) account ending in ***370”.
[xviii] For example, under a Federal Employees Retirement System division order, a survivor benefit permanently reduces the monthly benefit that would be received by both parties.