Most divorces involve a Qualified Domestic Relations Order (QDRO). The QDRO is required under Federal law to divide most employer-sponsored retirement plans. See here for more about QDROs. An employer may ignore a court order or divorce decree to divide a retirement plan unless the order qualifies as a QDRO. A QDRO must comply with I.R.S. regulations, U.S. Dept. of Labor regulations, and Texas law. Each plan has its own peculiarities, which may affect the language of a QDRO.
Most people, and many lawyers, do not know that a QDRO may be used to divide retirement plans without a divorce. When a postnuptial agreement gives one spouse some of the other’s retirement, this can be transferred to receiving spouse via a QDRO, even without a divorce.
In a QDRO, the employee is called ‘the participant.’ The non-employee spouse is the alternate payee. Most alternate payees are former spouses, but are not required to be.
The Employee Retirement Income Security Act of 1974, or ERISA, requires that most employer-sponsored retirement plans may only be divided between spouses or ex-spouses with a QDRO. Some plans for the highest earners (executive plans) are excluded.
ERISA allows a QDRO pursuant to state domestic relations law. Texas domestic relations law allows postnuptial agreements, often called Partition & Exchange Agreements. They partition and exchange community property to separate.
A QDRO moves funds from the participant/employee’s account directly to an account created by the retirement plan for the spouse or former spouse, the alternate payee. The alternate payee basically has their own account within the 401(K) plan.
A postnup can award a spouse some of the other’s 401(K). If the participant/employee later borrows against the balance or withdraws it, there will be nothing left for the other spouse if a divorce happens or on the death of the employee/participant, and the postnup will be meaningless. To guard against this, a QDRO may be signed by a judge.
Judges see lots of QDROs in divorce, but most are unaware that they have authority to sign one when no divorce is filed. This requires a knowledgeable lawyer who can explain the ERISA provisions to the judge. ERISA is a complicated federal statute in the United States Code.
A QDRO requires a motion, probably a trip to the courthouse (depending on the judge) and adds cost to the postnup process. If a divorce occurs and the retirement funds are unavailable because no QDRO was sought, the unavailable funds will probably be hundreds of time more than the cost of the QDRO would have been.
A pension is similar, but funds are not immediately transferred. The QDRO tells the plan administrator and employer to safeguard the funds and pay them directly to the spouse/alternate payee when eligibility is met. The specific dollar amount payable to the alternate payee (non-employee) is calculated when the payments are to begin based on a formula in the QDRO.
If a post-marital partition & exchange marital agreement gives one spouse an interest in the other’s retirement, a QDRO should be requested by a lawyer with knowledge of ERISA who can explain to the judge that it may be signed without a divorce. This safeguards the funds from being withdrawn or pledged to the plan administrator as security for a loan.