A QDRO or “Qualified Domestic Relations Order” is a document that instructs the administrator of a pension fund to distribute funds to another person (typically the ex-spouse) at the end of a marriage. Normally, pension funds cannot be distributed until retirement (or certain other events) so a court order is required to remove the funds from a 401k or other retirement fund.
In Nevada, all assets are community property so your spouse is entitled to half of the funds in your pension account from the time you were married to the date of your divorce (see here and here for a discussion of how community property continues to accumulate). You are also entitled to half of her pension. A QDRO could even distribute more than 50% (as high as 100%) as part of a broader asset division. For instance, you keep the house in exchange for giving her 100% of your pension accumulation. It could also work the other way, where she waives her interest in your pension for some other asset.
A domestic relations order is usually prepared by a financial consultant (either court-ordered or agreed by the parties). The order is then submitted to the court for the judge’s signature. It then becomes known as an “issued domestic relations order”. This is then forwarded to the plan’s administrator who must determine whether the order is valid (understandable and fair). The administrator has a duty to act in the interest of the fund holder. If the administrator approves the order it becomes a “qualified domestic relations order” or QDRO and the plan then writes a check for the ex-spouse or “alternate payee”. Otherwise the plan is returned to the parties for revision. The plan administrator must respond to a domestic relations order is a reasonable time with a reasonable set of procedures. All of this can take several months to occur.
So far, so good. Things start to get complicated on two fronts – how much was contributed during the marriage and what are the contributions worth today?
A defined contribution scheme (DCS) requires you to invest a proportion of your salary in a retirement account (and may be matched by your employer). Your spouse is entitled to half of the total contributions PLUS any accumulation during the marriage. Say you had $100,000 in the 401k on your marriage day and contributed a further $50,000 during your five-year marriage. On the day of your divorce, the fund is worth $180,000. So, at least $30,000 was earned through your investments on top of any contributions during the marriage. Clearly, the $100,000 is not a marital asset -but how much of the investment income is marital and how much separate income? The law says if funds are co-mingled they become a community asset – so it is very likely that the total community asset will be seen as $180,000-$100,000 = $80,000. The QDRO would then order the plan administrator to distribute $40,000 to your ex-spouse.
Complications can also occur if the fund declines in value from the day of divorce to the day of distribution by the plan administrator. Say the value of the 401k was only $160,000 on the day of distribution (a drop of $20,000 in value). Is it fair to distribute $40,000 to your ex-spouse? Clearly not and some plan administrators may reasonably reject such a request. This is why it may be better to write a QDRO in terms of a percentage of units in a fund – if the fund has 500 units then your spouse receives 250 units – whatever they are worth on the day of distribution.
Even more problematic is a defined benefits scheme (or DBS). Here a pension contribution buys a certain benefit after retirement (such as 50% of your final salary for life after twenty years service). Typically the proportion of the final salary may fall or rise depending on years of services. The pension may also be indexed to inflation, carry a lump sum option, or other benefits. Although complex calculations can be involved, the simplest method might be to award of percentage of the benefit when you retire to your ex-spouse based on the length of the marriage. The percentage may be contentious – let’s assume your receive 50% of your final salary after 20 years service but only 20% of your final salary after ten years service. Let’s assume you were married for the first ten years but then served another 20 years in the company. Should your ex-spouse receive 10% or 25% of your final salary? What if the situation were reversed – not married the first ten years and married the second ten years? Often this will just come down to the judge making a ruling rather than the parties reaching a agreement.
Naturally, all of this can become much more interesting when multiple DCS and DBS accounts are involved!