Routinely, QDRO fees in divorce should be split 50/50 between the spouses for a QDRO to be drafted. Property division during divorce can get problematic, which makes a QDRO essential for splitting a retirement plan.
But how does a QDRO come about in a divorce?
Read on as this article spells out how a QDRO comes about in a divorce and how the fee is paid.
Who Pays the QDRO Fees in Divorce?
Both spouses should split the fees equally, and each should pay one-half of the QDRO fees to the financial consulting firm that prepares the QDRO. These fees are paid directly to the contracted firm.
In some cases, plan documents could require that the plan participant (employee spouse) or the alternate payee, or both parties, pay a separate internal QDRO fee. Typically, this fee is deducted from the amount received by each party.
What Is a QDRO?
QDRO is a decree by the court directing the apportioning of a retirement plan to another party, typically a partner or dependant, during a divorce. It is short for qualified domestic relations order. A legal separation or divorce often involves the splitting of marital property. Such division doesn’t always apply to retirement plans, which necessitates the use of a QDRO.
The administrator of a plan can’t split the funds of the participant to pay their former spouse without the QDRO. This decree is particularly essential if the retirement plan (we shall refer to it as a plan onwards in this article) is a 403(b) or a qualified plan, such as a 401(k).
– How Much Does a QDRO Cost?
There is no definite answer to this question. The QDRO cost depends on the party that drafts it. The beneficiary can reach out to a divorce lawyer or attorney to draft the QDRO for the transfer of funds from the plan.
Plan administrators could also have standardized forms for the QDROs, which make the process easier and less costly. Depending on whether QDRO attorney fees are included, it could cost you a couple of hundred dollars to several thousand dollars to draft a QDRO.
If you involve an attorney or lawyer, you can expect to dig much deeper into your pocket.
How Does a QDRO Work in a Divorce?
A QDRO gives the beneficiary the right to a part of the retirement benefits that the participant accrued through their plan. In the case of a divorce, this order makes it possible for the alternate payee (or beneficiary) to receive a predetermined amount of the participant’s plan benefits.
For instance, a QDRO could pay out half of the plan’s value that has accumulated in the course of the marriage. These funds could be rolled over into an individual retirement account (IRA) for the beneficiary. Besides providing defined benefits to the beneficiary while the participant is still alive, QDROs are also essential for awarding survivor benefits in case the participant passes on.
In addition to granting a spouse’s or former spouse’s marital property rights, a QDRO can also be used to pay alimony or child support, depending on the beneficiary of the plan.
– Definition of Terms
Before delving into the working of a QDRO, let’s define some common terms used in this discussion:
- Participant: A plan participant refers to an individual who contributes to a plan and is entitled to benefit payments from the plan.
- Administrator: Refers to a contractor tasked with coordinating and managing a participant’s plan. Typically, an administrator has the knowledge and specialized skills regarding the regulation of such plans.
- Alternate Payee: Refers to any beneficiary, including spouse, former spouse, child, or other participant’s dependent recognized by a QDRO as eligible to receive all or part of the benefit plan.
– Who Files a QDRO in a Divorce?
When a judge enters a divorce decree, both parties are required to comply with the judgment. In cases that involve a plan, the participant is in a much better position to take the lead in the QDRO filing process as they have better access to information.
Where both parties are unrepresented by attorneys or lawyers, the participant will most likely be the responsible party for filing a QDRO. However, the beneficiary should also be active and participate in the process by providing information when requested.
If both or any of the parties are represented by an attorney, the attorneys will initiate and see the process through.
– Legal Significance of a QDRO
Most spouses wonder whether a QDRO is mandatory when splitting retirement assets. A QDRO isn’t a requirement by the court but rather by the plan administrator. During a divorce, a court determines the percentage of the plan each spouse receives or assigns a dollar value to each spouse. Yet, it is a QDRO that realizes the division order by the court.
Unlike the division of other marital property, plans are regulated by specific rules that can’t be modified by a court order. It means that spouses’ agreements may be invalid and unenforceable under the terms of a retirement plan. A divorce attorney can advise you when dividing marital property, including whether you need a QDRO to divide your retirement plan.
Typically, QDROs are needed for the division of qualified plans such as 401(k)s, 403(b)s, and pensions. They aren’t necessary for the division of IRAs or Roth IRAs.
What Are the Steps for Filing a QDRO?
The process of filing a QDRO begins after the finalization of a divorce.
Typically, the process follows the steps below:
- The court enters a decree regarding the division of a qualified retirement account. In doing so, the court assigns a portion of the account transferable to the beneficiary. The amount transferable will include any gains or losses on the account between the date of the order to the transfer date. This amount won’t include the ongoing defined contributions of the participant.
- Your attorney or lawyer will reach out to a financial services firm for the preparation of the QDRO.
- The divorcing parties will pay the QDRO fees directly to the financial services firm, with each party contributing one-half share of the fees. QDRO fees are not paid off the amount to be received from the QDRO.
- The contracted firm will reach out to the plan administrator to determine the terms of the plan for the division.
- Based on the divorce judgment and plan requirements, the financial services firm will draft a QDRO and submit it to the administrator for approval.
- If approved, the contracted firm will send the QDRO to your lawyer to file it with the court. If the QDRO isn’t approved the first time, the financial services firm will revise it until the administrator approves it.
- Upon preliminary approval, the administrator submits the QDRO to the court for final approval.
- Once the judge signs the QDRO, he or she will return it to your lawyer. The QDRO is then forwarded to the contracted firm, which submits it to the administrator for the division.
- The administrator will advise the beneficiary on how to establish and access their new account. The participant will also be notified of the successful division of the account.
– How Soon Will a QDRO Be Paid Out?
The beneficiary can expect a distribution package or plan information after 30-60 days upon the administrator’s final approval of the QDRO. Depending on the administrative policies, the number of days for processing a QDRO could differ from one case to the other.
Most people would expect, or at least hope, that monies from a QDRO are cashed out immediately. However, this isn’t the case. The portion of the participant’s account is transferred or rolled over to the beneficiary’s plan, which could be a qualified pension plan or an IRA.
– Who Pays Tax on a QDRO?
Any tax to a QDRO distribution is paid by the plan participant. The money is subject to income taxes if the recipient transfers it into a non-IRA account. However, a QDRO is meant to avoid the negative implications of taxes and penalties that arise from the division of a spouse’s retirement accounts during a divorce.
Most transfers resulting from a QDRO are tax-free and penalty-free. Taxes and penalties are only levied if either party wants to cash out their account after division.
– What if One Spouse Refuses To Contribute their Portion of the QDRO Fees?
The court will hold the party that refuses to pay their portion of the fees in contempt.
The QDRO processing fee must be paid in full for a QDRO to be completed and filed. Failure to file QDRO for refusal to pay the fees means that the process of dividing the plan is held up.
During a divorce, an individual with a plan will almost always need a QDRO for the division of that plan. Through this article, you have understood the significance of a QDRO and the fees involved, so let’s wrap up the discussion:
- A QDRO is vital for the division of a plan during a divorce.
- It is the plan administrator that requires a QDRO, not the divorce court.
- Depending on the terms of a plan, QDRO fees could be hundreds of dollars or several thousand dollars.
- In most cases, both parties in a divorce are expected to submit their half portion of the QDRO fees to the financial services firm that is to file it.
Most people are unfamiliar with QDROs and their significance during a divorce. If you are not sure whether you need one during your divorce, you should seek the counsel of an attorney or lawyer who specializes in family law. It will also help you understand how much you’ll pay in qualified domestic relations order cost and any other fees that may accrue.
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