What Does a QDRO Mean for Your Divorce?
Divorce attorney Jason V. Owens examines Qualified Domestic Relations Orders (QDROs) and the unusual timing issues they present in a divorce.
A common tool in divorce cases is the Qualified Domestic Relations Orders, better known as the QDRO (commonly pronounced as ‘quadro’). But what is a QDRO and what does a QDRO mean for your divorce?
What Is a QDRO?
A QDRO enables a state judge presiding over a divorce case to order the division of federal retirement benefits, such as pensions or 401k accounts, which are ordinarily shielded from lawsuits and subject to rules that prevent participants from assigning benefits to others. Using a QDRO, an individual can receive a direct interest in their former spouse’s retirement plan, almost as if the former spouse had earned the benefits him or herself.
As we have discussed in earlier blogs, drafting QDROs poses many challenges for divorce lawyers. Preparing a QDRO often has less to do with divorce law than understanding federal law controlling pensions and retirement, such as ERISA, and interpreting the unique plan rules that dictate each retirement plan. For a QDRO to work, it must (1.) satisfy federal and state law, (2.) be consistent with the specific retirement plan’s rules, and (3.) pass muster with the skeptical (and often rather picky) attorneys who review QDROs on behalf of retirement plans. For this reason, many divorce attorneys rely on QDRO specialists to prepare the actual QDRO instrument.
Table of Contents for this Blog
- QDRO Specialists: Only as Good as the Language in the Divorce Agreement
- What Can Your QDRO Do For You…and Your Former Spouse?
- Get Your QDRO Done Quickly: Why Former Spouses Drag Their Feet on Pension QDROs
- Is There a Time Limit for Filing a QDRO After a Divorce?
- What Happens When a Participant Dies Before a Pension QDRO is Approved by the Plan Provider?
- Don’t Wait Long to File Your QDRO After Your Divorce
- When Possible, File the QDRO With the Final Separation Agreement Instead of Waiting
QDRO Specialists: Only as Good as the Language in the Divorce Agreement
As noted above, divorce attorneys commonly outsource the preparation of QDROs to specialists.Even the best QDRO drafting specialist has limits, however. For example, the parties’ Separation Agreement must include enough details – and the proper terms – for the QDRO specialist to prepare an instrument that passes muster. For example, divorcing spouses often run into problems if their Separation Agreement seeks to provide a former spouse with benefits that are not allowed under plan rules. This is especially common with survivorship benefits for pension, where many pension plans narrowly restrict how death benefits may be paid to both surviving spouses and former spouses. Parties whose agreement provides for survivorship benefits that are not allowed under their plan’s rules may find their QDRO rejected, with solutions sometimes hard to achieve after the divorce is done.
What Can Your QDRO Do For You…and Your Former Spouse?
Divorce lawyers often hear the following mantra from retirement plan administrators: a QDRO cannot grant rights to a former spouse that are better than the rights enjoyed by the participant spouse under plan rules. In other words, a former spouse can’t receive more generous benefits under a QDRO than the actual retiree receives him or herself. Of course, this is not entirely true. There are several practical ways that a QDRO can confer superior rights and benefits compared to an ordinary retiree:
- No 10% Penalty on Funds Transferred via QDRO – The “qualified” part of many retirement plans, such as 401k or 403b accounts, comes with a price: the 10% penalty for early withdrawals. A little known fact is that any funds transferred from a qualified retirement account (such as a 401k) via QDRO are stripped of the 10% penalty, such that the former spouse can immediately withdraw funds without facing the penalty once the QDRO transfer is complete. A former spouse must still pay ordinary income taxes on any distribution, but for divorced spouses who are years away from retirement age, the reality is simple: $100,000 in qualified retirement funds received by a former spouse via QDRO is worth $10,000 more than the same funds held by the participating spouse. (Indeed, smart divorce mediators are fond of exploiting this “loophole” by structuring divorce agreements that transfer substantial funds between spouses via QDRO, thereby “washing away” the 10% penalty as thoroughly as possible for both spouses.)
- Assigning Retirement Benefits with Third Parties – Imagine a married spouse who wants to withdraw from his or her retirement plan to buy something for his or her spouse. Most qualified retirement plans prohibit plan participants from transferring any share of their benefits to a friend, relative, business associate or even their spouse. (Yes, many plans offer survivorship benefits that enable participants to leave a beneficial share to another, but the participant must literally die in order to access this benefit.) In general, a QDRO is the only way for a participant to directly transfer shares of his or her retirement to a third party while he or she is still alive. Given how much money can be at stake in a divorce, QDROs offer crucial flexibility and options for both spouses to allocate assets that, for anyone not going through a divorce, could not be transferred easily between individuals.
- Passing Tax Liability to a Former Spouse. Building on the example above, a QDRO not only allows a participant to transfer a portion of their retirement benefits to a third party former spouse, it also allows the participants to pass all of the tax consequences associated with the benefits to the former spouse. With a QDRO, a plan holder may transfer substantial retirement benefits directly to his or her former spouse in their pretax form, placing the tax burden solely on the receiving spouse when a distribution is made. For pension holders at or nearing pay status, using a QDRO to transfer a share of the pension to a former spouse is sometimes preferable over paying “out of pocket” child support or alimony to the former spouse.
- Early Access to Some Plans and Benefits. Many employer or union-based 401k, 403b and/or qualified annuity plans include strict rules prohibiting withdrawals while participants remain employed by the company or organization in question. These rules are often far more restrictive than the 10% penalty, with employer plans often restricting employees to 401k loans (rather than allowing direct distributions from the plan) or requiring the participant to prove he or she is facing some sort of “hardship”, like unpaid medical bills or paying for a child’s college. In many cases, the only way to circumvent these rules is to stop working for the employer. A QDRO frequently provides another way to circumvent these rules. In layman’s terms, a QDRO requires the employer to create a separate account in the receiving spouse’s name under the retirement plan. Into this account, the funds provided by the QDRO are transferred. However, because the receiving spouse is not a current employee, the receiving spouse can frequently access the funds immediately, without the need to demonstrate a hardship, take out a 401k loan or even pay the 10% penalty. (It is important to note that such rights can vary from plan to plan, and spouses should never assume what rights a former spouse might have following a transfer by QDRO without asking.)
- Additional Survivorship Benefits for Pensions. The most challenging part of dividing pension is often allocating survivorship benefits. For a 401k or similar pretax retirement account, survivorship benefits are generally irrelevant, because the former spouse can receive his or her full share of the account immediately following the divorce. For defined benefit pension plans, however, survivorship benefits are a big deal. After all, if a retiree dies 3 years after hitting retirement age, a former spouse’s share of the benefits may stop unless survivorship benefits have been properly addressed. Survivorship benefits under many pension plans are complicated, even for couples who stay married. Survivorship rules are often arcane – with different benefits available to spouses and former spouses, and major differences in survivorship benefits for participants who die before reaching retirement age vs. after. Some pensions limit survivorship plans to a single lump sum option. Meanwhile, others provide multiple options. Remarriage by either the participant or former spouse often triggers eligibility issues for survivorship under different plans. One size definitely does not fit all. All that, under some plans, a divorce allows the participant to create two sets of survivorship benefits: One for the former spouse and another for a new spouse or family member. This silver lining generally comes with a lot of baggage, but for those who qualify, it does present another way to apportion survivor benefits.
Get Your QDRO Done Quickly: Why Former Spouses Drag Their Feet on Pension QDROs
Because Massachusetts allows spouses to divide retirement accounts after a divorce has been finalized, it is not uncommon for parties to drag their feet – or forget altogether – that a QDRO must be prepared, filed with the Court, and approved by the plan providers, in order for a former spouse to access the benefits guaranteed to him or her under the divorce agreement. It is important to recognize that the retirement plan provider – whether it is a private company, a union, or state or federal government – is not a party to the divorce proceedings, and federal law prevents the kind of transfers contemplated in most Separation Agreements if a QDRO is not used.
In general, former spouses are on the ball when it comes to preparing and filing a QDRO for the transfer of pretax retirement accounts such as a 401k or 403b. In most instances, these funds are available immediately to the former spouse once a QDRO is complete, making the completion of a QDRO a matter of some urgency. However, the same is not always the case for defined benefit pensions. In many cases, a former spouse’s right to collect pension benefits will not kick in for many years after the divorce is complete. The remote, far away nature of the benefits means that many former spouses are less motivated to file a QDRO immediately after the divorce has ended. The former spouse may receive a letter from his or her attorney notifying the client that a QDRO must be done, but if the client does not follow up, the attorney may move onto other cases.
Is There a Time Limit for Filing a QDRO After a Divorce?
Under Massachusetts law, there is no time limit to file a QDRO after divorce. To move the process along and prevent delays, however, it is best to submit the QDRO with the divorce agreement. Putting off the preparation and filing of a QDRO often leads to procrastination - or worse.
As a divorce attorney, I regularly receive phone calls from panicked former spouses who were divorced a decade or more earlier – who sudden realize a QDRO was never filed after their divorce. The motivating factor is often that the other party has reached retirement age, at which point the receiving spouse realizes that the pension benefits he or she expected won’t start flowing without a QDRO. Thankfully, courts are used to receiving QDROs many years after the fact, and most of these issues can be resolved with a bit of paperwork. However, the more time that passes, the more difficult it generally becomes to correct problems in the divorce agreement or QDRO creation process.
In general, there is no time limit on when a Probate and Family Court will review and issue a QDRO. Unfortunately, the same is not always true when it comes to retirement plan administrators, particularly if a participant dies before a QDRO is filed.
What Happens When a Participant Dies Before a Pension QDRO is Approved by the Plan Provider?
One scenario in which a failure to file a QDRO after a divorce can become quite serious is if the pension participant dies before the QDRO is approved by the retirement plan. This came up in a recent federal case, Garcia-Tatupu vs. NFL (2017). In Garcia-Tatupu, the former wife of a New England Patriots running back, Mosiula F. Tatupu, sued the NFL Retirement Plan after the plan refused to approve a QDRO following Tatupu’s death which provided the former wife with agreed-upon benefits under their 1997 Separation Agreement. The published opinion discussed below dealt only with the NFL’s motion to dismiss the suit of Tatupu’s former wife. As you will read , the former wife avoided dismissal, meaning her case continues forward, but the cost of resolving the matter in federal court was no doubt considerable.
The District Court provides a nice – if fairly technical – description of how QDROs interact with federally protected retirement plans:
ERISA is a federal regulatory scheme that governs employee benefit plans; all benefit plans must conform with ERISA reporting, disclosure, and fiduciary requirements. Boggs v. Boggs, 520 U.S. 833, 841 (1997). Pension plans must also comply with participation, vesting, and funding requirements. Id. As a general matter, pension plans may not be assigned or alienated. 29 U.S.C. § 1056(d)(1). An exception to this general rule is made for QDROs. 29 U.S.C. § 1056(d)(3).
The Retirement Equity Act of 1984 (REA) amended ERISA to ensure pension income for surviving spouses. Boggs, 520 U.S. at 843. As specifically relevant to this case, the REA expanded ERISA protections by providing that “if a vested participant dies before the annuity start date, leaving a surviving spouse to whom he has been married for at least one year, a qualified preretirement survivor annuity shall be provided to the surviving spouse.” Hamilton v. Washington State Plumbing & Pipefitting Indus. Pension Plan, 433 F.3d 1091, 1095 (9th Cir. 2006); 29 U.S.C. § 1055(a)(2).
A qualified domestic relations order is defined, in part, as a domestic relations order “which creates or recognizes the existence of an alternate payee’s right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under the plan. . . .” 29 U.S.C. § 1056(d)(3)(B)(i)(I). A domestic relations order is considered a QDRO only when certain requirements are met under ERISA, 29 U.S.C. § 1056(d)(1)(C)-(D), as will be discussed in greater detail below. I observe as a general proposition that Linnea Garcia-Tatupu, as a former spouse of a pension plan participant, may be treated as a surviving spouse of the participant, and as such is treated as meeting all of the applicable marriage requirements because she was married to a plan participant for at least one year. 29 U.S.C. § 1056(d)(1)(F); 29 U.S.C. § 1055(f).
Exactly why and how the former wife failed to file a QDRO after the 1997 divorce is less important here than the following basic facts: (a.) the parties agreed to assign a share of Tatupu’s NFL pension benefits to the former wife via a QDRO in their 1997 divorce agreement, (b.) when Tatupu died in 2010, no QDRO had been filed with the league, and (c.) after a Probate and Family Court judge allowed a QDRO in 2011, following Tatupu’s death, the NFL declined to pay benefits to the former wife under the QDRO because she failed to file a QDRO before Tatupu died.
The NFL cited three “plan rules” in support of its denial of benefits to the former wife:
First, that the “retirement benefits are not payable where a Player dies before he has made an election to receive retirement benefits under the Plan,” because these retirement benefits only continue after a player’s death “where the Player properly elected a form of benefits that includes payment after his death to his survivor.” Tatupu received a partial lump-sum retirement payment while living, but he had not made an election with respect to the remainder of his pension.
Second, that there must be a surviving spouse at the time of the player’s death for benefits to be paid, and Tatupu did not have a surviving spouse at the time of his death.
Third, that although QDROs can have a retroactive effect, Tatupu had neither a surviving spouse nor minor children, and so the QDRO cannot create a new benefit that is otherwise not payable.
Ultimately, the Federal District Court denied the league’s motion to dismiss, allowing Tatupu’s former wife to proceed with her suit. Whether she will prevail is a matter of federal law. One could speculate that Tatupu’s former wife should be able to settle her case with the league, given the publicity surrounding the early deaths of so many retired NFL players and the league’s desire to avoid the perception that it is insensitive to the plight of family members of former players who die young. Of course, one might also argue that the NFL has an incentive to win this case because so many former players die early, resulting in major pension payouts to surviving spouses. Indeed, if this case were only about the failure to file a QDRO, it may have settled already. However, the case is not limited to former spouses after a divorce.
The first reason the NFL cited for denying benefits was that Tatupu failed to name anyone as his beneficiary under the pension. In theory, this means the league would have refused to pay benefits even if the parties were still married at the time of Tatupu’s death. Given how young former NFL players tend to die, the benefits paid to surviving beneficiaries can be quite substantial. (Without getting into specifics, it seems likely that the shares paid to beneficiaries are larger for players who die younger.) It seems likely that the NFL is less concerned about the narrow post-divorce issues in this case versus the larger issue of whether family members in general are entitled to survivor benefits when a player failed to identify any specific beneficiary before his death.
Don’t Wait Long to File Your QDRO After Your Divorce
For ordinary former spouses who never married NFL players, the main takeaway from the case is common sense: unless you plan on filing a federal lawsuit against a well-funded retirement plan, make sure a QDRO is filed with the Court and submitted to the plan soon after the divorce is complete. It is hard to say what will happen in Tatupu-Garcia’s case, but we can say for sure that life would have been much simpler for her if she had filed the QDRO soon after her divorce, at which time Tatupu probably would have been compelled to fill out any additional paperwork required by the league. If she wins, the court fight will have proved an expensive undertaking.
When Possible, File the QDRO With the Final Separation Agreement Instead of Waiting
In closing, I will say this in defense of divorce lawyers everywhere: One reason divorce attorneys often do not have QDROs ready on the day parties get divorced is because so many clients bristle at paying $500 to a QDRO specialist instead of negotiating to share the fee after the divorce is over. There is nothing wrong with preparing QDROs after a divorce; indeed, our office frequently prepares and files QDROs after a divorce is complete for a variety of reasons. However, if a QDRO can be prepared in advance of a final divorce hearing – and presented to the judge on the same day he or she reviews the Separation Agreement – this is almost always preferable for clients.
Again, many divorce agreements are not fully settled until the last minute, immediate priorities crowd out tasks that can be completed later, and other issues prevent parties from filing a completed QDRO at the same time as a divorce agreement. When it can be done, however, preparing and filing a QDRO with the final agreement is almost always worth pursuing.