When you are dividing up your marital assets and property in a divorce, you must consider your and your spouse’s retirement accounts as possibly part of these assets to be divided. It is not uncommon for one party to be awarded part of the other party’s 401(k) or other retirement account as part of the settlement agreement. When you reach an agreement that one spouse is going to receive a certain percentage of the other spouse’s retirement account, this will be put in your settlement agreement. However, just because you agreed to it in your divorce does not mean that the financial institution handling your retirement will take the money out and give it to your spouse. They will require a special Order from the judge in your divorce case called a Qualified Domestic Relations Order or QDRO.
This special kind of Order is required by federal law in order for the institution to take the money out of the retirement account to be distributed to the spouse. In a QDRO, the person who owns the account is the “participant” and the party receiving money out of the account is called the “alternate payee”. Federal law prohibits the financial institution handling these retirement accounts from paying any monies from them to anyone except for the participant, unless there is a QDRO ordering them to do so.
For example, if you and your spouse have in your divorce settlement agreement that the wife is to receive one half (50%) of the husband’s 401(k) retirement account then this will require a QDRO in order to be executed by the financial institution handling the account. This QDRO will be signed by the divorce judge in your case when your divorce decree is finalized and is a separate Order that you will receive alongside your divorce decree.
Once you receive this Qualified Domestic Relations Order, then you must get it to the financial institution handling the account and they will take it from there. Basically, how they distribute the money to the alternate payee depends on what type of account it is. If it is a retirement account that the owner cannot have access to until they reach a certain age, then unless the owner is of this age, then they do not have access to the funds to be able to distribute them to the other spouse. However, if the owner does have access to the funds in the account, then part of the funds can be distributed to the other spouse through a QDRO.
Usually, once the financial institution receives the QDRO, they will open up another retirement account and place the funds to be distributed to the alternate payee into this account. However, how these funds are distributed can depend greatly on the particulars of your retirement account and the institution handling it. Sometimes, variations of a standard QDRO are necessary, again, depending on the type of retirement account that you are dividing up (military, 401(k), etc.).
If you retain a national online document preparation company to prepare your divorce documents, they might not realize that you need a QDRO and, therefore, not prepare one for you since they did not have an opportunity to counsel you in order to find out that one is necessary. This is why it is important to talk to a local divorce attorney in order to obtain legal advise so that you know all of the document requirements in your particular situation.