When a retirement account is split in a divorce action, you must have a Qualified Domestic Relations Order (“QDRO”) signed by the Court. QDROs must meet certain specific requirements set out by federal statute. If your case will involve a QDRO, it is highly recommended that you have an attorney. An improperly prepared QDRO will be rejected by the retirement plan administrator.
When a QDRO is required in a case, I ask clients to request sample QDRO language from their plan administrator. Most plans have either sample language or guidelines for QDROs that they will provide. The QDRO will specify either a percentage or a dollar amount that is going to the soon-to-be-ex-spouse, along with a division date. Even though the account will not be technically split until a later date, the date listed in the QDRO will be used by the plan to determine the appropriate amount for each party.
Once the QDRO is accepted by the plan administrator, the plan is essentially split in two. The alternate payee (ie: the person who did not originally own the account) will be given several options. He or she can generally (a) cash out his or her share, taking on any tax consequences of doing so, (b) leave the money in the new account that has just been created by the plan, or (c) roll the money over into another retirement account. I recommend that clients speak with a financial adviser and/or accountant before choosing which option is best in his or her situation.