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The breakup of a marriage is never easy, but for Maria Johns, the acrimony has extended more than a year past her divorce date.
Johns, a Florida resident, was officially divorced from her husband in July 2007. But the two are still wrangling in a Tennessee court over a qualified domestic relations order, or QDRO. It is the court order that awards a portion of a 401(k) retirement account to an ex-spouse. Paperwork has been signed but not received, and at last count, two drafts of Johns' QDRO were winding their way through the courts. The proceedings have been an expensive proposition for Johns, who had let her original attorney go immediately after her divorce became final.
"I had to hire another attorney at full rate to handle this," Johns says. "I had to pay a $5,000 retainer just to have him look at this and respond."
The process of obtaining a qualified domestic relations order is part of the Employee Retirement Income Security Act of 1974 and is aimed at awarding part of a 401(k) account, pension plan or some other qualified retirement plan to someone other than the account holder, most often an ex-spouse. The legal action, completed with the court order, seems simple, but as Johns learned, things don't always go smoothly.
Here's what you need to know before getting started.
You may not need a QDRO
If you and your soon-to-be-ex both have retirement accounts with approximately the same value, it may be easier for you to just walk away with your own account and skip the QDRO process, says Dennis De Kok, a certified financial divorce practitioner with Family Capital Management in Grand Rapids, Mich.
However, De Kok warns, don't make the mistake of giving your spouse a $50,000 bank account while you only take your own $50,000 retirement account. Early withdrawal penalties and taxes would significantly whittle down your 401(k) balance if you liquidate it today, while a checking, savings or other cash account is worth its face value immediately. "It's really an inequitable settlement," De Kok says.
Dot your i's, cross your t's
Every company that administers retirement plans has different rules about what must be included in a qualified domestic relations order. So make sure whoever is drafting yours is aware of them. In most cases, this will be your divorce attorney. Most companies have a boilerplate document they'll send upon request.
"Everyone has their rules," De Kok says. "If you don't check with them, they may reject it because this name wasn't in there or that phrase wasn't included. That causes delays upon delays."
Keep an eye on the balance
If you're the nonemployee spouse, make sure that your attorney asks for past statements of your ex's retirement account from the past three to five years and continues to receive them while the divorce is pending, says Gabriel Cheong, a family-law attorney in Quincy, Mass. If you know how much money is in the account, you'll be able to easily detect any unauthorized withdrawals, transfers or other changes that are prohibited while a divorce is in the works. If your spouse does manage to remove some money anyway, Cheong says, those funds aren't always lost. The qualified domestic relations order could be written to award you a larger portion of the 401(k), or you could even get half of whatever asset the purloined money bought.
"If your spouse takes money from the 401(k) and puts money down on a house, half of that new house could rightfully belong to the other spouse," Cheong says. Divorce laws vary by state, so consult your attorney about the remedies available to you.
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