The Hidden Cost of a QDRO in Divorce

hidden assets

Retirement benefits, perhaps even more than the marital residence, tend to be the most important marital assets in divorce, not only because of their equity but because they represent a guaranteed income in later years. For many spouses, the retirement benefit is the bridge to security.

During divorce, the court must decide how to apportion retirement benefits. Generally, a spouse has a right to half of the marital portion of the other spouse’s retirement benefit. For example, if A and B have been married ten years, and B has worked for twenty years at company X that has contributed to a pension fund for B, A would have a 10/20 or ½ interest in the value of the pension as of the date of the divorce. What this means is that A has not only the half interest in the value determined as of the date of divorce, but all the growth of that sum that occurs up to the time of receiving benefits.

A federal law (ERISA) allows courts to divide retirement benefits in divorce, and so long as the recipient spouse rolls the sum into his or her own retirement account, the division has no immediate tax consequences.

How does the division of a benefit occur? A court will enter a Qualified Domestic Relations Order (QDRO), which will direct a plan administrator to set aside or apportion part of an individual’s retirement to a former spouse. While this should seem a matter of simple accounting, approving a QDRO has become an unpleasant game of jumping through hoops.

While it would make sense to have a uniform QDRO that all companies adopt, it turns out that companies tend to develop their own special form and set of requirements. This mean a lawyer must review the plan documents and write a QDRO that the plan will approve. It is unfortunately not uncommon for a court to sign a QDRO only to later have the plan reject the QDRO as nonconforming to the format demanded of the plan. As a result, drafting a correct QDRO can cost more in legal fees than a client anticipates.

Additionally, as detailed in this article in Bloomberg News, each plan charges a processing fee for their hoop jumping – a fee that can range from $500 to $1,200 or more – just for simple paperwork authorized by law. More and more divorced individuals and attorneys are complaining about these fees, because the lawyers draft the plans and the court enters the QDRO, so what exactly does the plan do to justify the fee? In reality, very little – but having their own quirky forms helps justify the “effort” put into a case and charge a high fee.

While the fee is too high, parties to divorce should know it exists and to help defray the costs to one party, the parties should consider splitting the fee or having one party pay if that party has a much higher income, as the fee can be burdensome to certain individuals.

If you have questions about QDRO fees and divorce, contact us – we can help.

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