In our office, every Qualified Domestic Relations Order (QDRO) request that comes in our door is treated as a time sensitive “hot-potato.” If the owner of the retirement account dies, remarries or retires, the ex-spouse could receive significantly limited (or no) benefits, regardless of what their Judgment of Divorce (JOD) awarded.
Look at this example:
Jane has a 401k account through her employment. Her ex-husband was awarded 50% of the account balance via their JOD. They put off getting a QDRO prepared; their legal fees were more than they expected; they have other short-term bills to pay; or maybe they forgot. If Jane were to die or retire before the QDRO gets entered and approved, John could end up forfeiting his share.
How can this happen?
Regardless of what Jane and John’s JOD indicated, it’s not binding on a third party, such as the 401k’s Plan Administrator. If Jane changed her account beneficiary and died before entry of a QDRO, her 401k would be transferred to her designated beneficiary. Then, John’s only recourse would be to file a claim against Jane’s estate.
QDRO processing time is critical:
Many years ago, we encountered a situation that emphasized the importance of timing. The wife had planned to begin drawing money from her half of her husband’s qualified retirement accounts immediately following divorce. She had two small children and planned to stay at home for a few years before returning to work. The JOD had assigned her the responsibility to initiate the QDRO drafting process, but under-estimating the significance, she put it off for a few months.
Tragically, her ex-spouse committed suicide, and his accounts were transferred to his mother, per his beneficiary designations. The wife contacted the Plan Administrator and argued that her JOD had awarded her half the accounts. Unfortunately, the wife did not understand her attorney’s previous explanation that beneficiary designations always take precedence over a party’s JOD.
When an individual is married, their spouse is automatically entitled to beneficiary rights on qualified retirement accounts. In fact, a spouse can’t be disinherited unless they sign a waiver. The day after a marriage ends, however, their spousal rights are extinguished. The only document that gives an ex-spouse any right to plan benefits is a QDRO.
Since no one can predict the future, we ALWAYS recommend attorneys enter the QDROs simultaneously with the JOD. To clients, paying for a QDRO can seem like an unnecessary hassle when they’re still dealing with custody issues, alimony or refinancing a home. However, clients need to be reminded, for their sake as well as their attorney’s, a QDRO is not just another legal expense. Timing is critical.