Top 3 QDRO Mistakes That Can Cost You Thousands

QDROs may seem like mere paperwork—an afterthought. In fact, QDROs are very important because it’s often how one gets the money due to them.  Before and after the divorce itself, it’s important to focus on QDROs in order to avoid costly mistakes. Here are the top three QDRO mistakes that can cost you thousand:

QDROs sound technical, and they are. There are terms that are rarely used in any other areas of law and plan-specific language that only a seasoned drafter would know.

QDROs are also one of the most common places where divorcing spouses lose real money — sometimes tens of thousands of dollars because a simple step was skipped, mistimed, or misdrafted. By the time the mistake surfaces, the money is often gone, and getting it back is difficult or impossible.

Here are the three mistakes I see most often, and what to watch for.

Mistake #1: Waiting too long to draft and submit the QDRO

Famously, QDROs do not have to be filed by a particular deadline. When people divorce, they want to take a breath and close that chapter in their life. Unfortunately, this means that many people forget about their QDROs. Because there is no particular deadline, they are lulled into a false sense of security. Years can go by, even decades!

QDROs should be a post-divorce afterthought. Your divorce decree may say you’re entitled to “half” but that doesn’t close the book on the subject. Until the QDRO is drafted, signed by the judge, and approved (or “qualified”) by the plan administrator, you have a promise on paper — not an account balance. What could go wrong?

• Your former spouse can take loans against the account, reducing the balance available to divide. You may be thinking that you could argue that a loan shouldn’t affect the entire balance but that argument, even if you’re right, may cost you thousands.
• Your former spouse can take a distribution or hardship withdrawal, again reducing the balance — and you may have no practical recourse if the money is already spent. Moreover, the right to take these distributions or withdrawal are rarely negotiated, so returning to court to fight this battle could cost you thousands.
• Your former spouse can die. Without a qualified QDRO and the proper survivor-benefit elections in place, you may lose your entire share, particularly with pensions. It may be that you have a cause of action against your former spouse’s estate, but hiring a lawyer to resolve that complicated matter could cost you sounds.
• Your former spouse can remarry, and depending on the plan, a new spouse may automatically become the beneficiary for survivor benefits unless your QDRO has already locked in your rights. You may be thinking that, nevertheless, the promise was made and that promise has some dollar value. You may be right but winning that law suit could cost you thousands.
• Markets move. If your share is described as a percentage as of a past valuation date, delay can mean missing out on gains — or being exposed to losses — depending on how the order is worded. You can’t sue your former spouse if your share loses value (if that’s what the court order and the QDRO says). Your delay has simply cost you thousands.

The fix is unglamorous but powerful: get the QDRO done quickly. Don’t dely. Don’t assume your attorney is doing this automatically or your former spouse is handling it. Be proactive. Ask.

Mistake #2: Not exploring ALL the benefits offered by a Plan.

Most people will divide retirement in “half.” Or give some proportion or dollar figure to their former spouse. This is treating a retirement plan like a bank account. But, retirement benefits often many other benefits which somewhat hidden, unless you take the time to explore your own benefits.

• Survivor benefits in pension plans. If the order doesn’t specifically designate you as the surviving spouse for purposes of a Qualified Pre-Retirement Survivor Annuity (QPSA) and a Qualified Joint and Survivor Annuity (QJSA), your entire benefit can disappear if your former spouse dies before retirement, or shortly after.
• Early retirement subsidies. Some pensions sweeten benefits if the employee retires early. A well-drafted QDRO captures your share of that subsidy. A generic one often doesn’t.
• Disability benefits. Many plans permit you to take money early or without penalties (or lesser penalties) if you are disabled. This is a benefit that can be negotiated and addressed in a QDRO. If you don’t, it could cost you thousands.
• Loan balances. If your spouse has borrowed from the 401(k), the order needs to be clear about whether the loan reduces only the participant’s share, or both shares. The default isn’t always what you’d want.

These are not academic distinctions. On a meaningful pension or a long-tenured 401(k), the difference between a thoughtful QDRO and a generic one could easily cost your thousands.

Mistake #3: Agreeing to terms the plan can’t actually do

This one happens at the settlement table, long before any QDRO is drafted — and by the time it’s discovered, it may be too late.

A QDRO is not a magic wand. They are complex legal documents that order plans to take specific actions (such as transfer a certain amount of money from a plan and create a new plan for the former spouse.) In this sense, the plans can only do what the order tells them to do. If the order tells them to do something they can’t do—legally impossible—the plan cannot process the QDRO.

Some of the most common impossible terms:

• Promising an immediate lump-sum payout from a pension that doesn’t allow one. Many defined-benefit pensions only pay as a monthly annuity, often beginning at the participant’s earliest retirement age, especially if the participant is already retired. A settlement that says you’ll receive “$80,000 from his pension within 60 days” may be flatly impossible. The plan pays what the plan pays, when the plan pays it.
• Awarding benefits that have already been awarded to someone else. If a prior spouse has an existing QDRO on the same account, your share comes out of what’s left — not the original balance. Former spouses may be collecting benefits already. Settlements drafted without checking for prior orders routinely overpromise.
• Using a valuation date or formula the plan won’t honor. Some plans only value accounts on certain dates, or won’t apply gains and losses retroactively. A creative formula your lawyers worked out may simply be impossible to administer.
• Treating an IRA, a federal plan, or a state pension as if it were a 401(k). 401(k)s are the easiest to understand in many regards. They seem like a simple bank account. But after you’ve negotiated your settlement agreement and gotten divorced, what if you discover that the plan you thought was a 401k isn’t a 401k at all. It could be, for example, a pension of some sort. Or vice versa: you thought there was a pension and in fact, it’s just a 401k. You can’t take a monthly benefit (like you get from a pension) from a 401k. The plan will have no idea what you’re talking about and reject the order, costing you thousand.

A practical takeaway

Retirement accounts are often the largest asset in a marriage other than the house. Almost no one would buy or sell a house without ever consulting an attorney. And yet, people often divide their retirement benefits without expert guidance and think they can implement a QDRO without a seasoned QDRO drafter. These are mistakes that can cost you thousands!

If you’re in the middle of a divorce, or you have a settled divorce with a QDRO that was never finalized, talk to a family law attorney who specializes in QDROs, such as those at Weinberg & Schwartz. A short consultation now is far cheaper than the alternative.