Things Every Lawyer Should Know About QDROs
(whether they draft them or not)

Kevin M. Kane

It is important for every attorney who practices family law to have a basic understanding of how retirement plans are divided in a divorce. Even if you never draft a Qualified Domestic Relations Order [QDRO], nearly every marriage settlement agreement [MSA] will address the division of a retirement plan. A working knowledge of the issues involved in pension division is important in order to avoid committing malpractice in drafting the MSA and to give your clients realistic expectations for the process. The following tips are culled from the author’s experience reviewing Judgments for clients seeking assistance in drafting a QDRO to implement the division of retirement plans provided for in the Judgment. Many of those clients did not really understand what a QDRO is or why they needed one. In some cases the divorce judgment was entered years previously, but nothing had been done to enter the QDRO. In several cases a court order intended to be a QDRO had been sent to the retirement plan but rejected by the plan. Then years went by with nothing further being done.

A divorce judgment may contain a brief paragraph stating something like “The parties’ retirement plans will be divided. They shall retain an attorney to prepare QDROs and divide the cost.” Often times a simple statement in the Judgment will work out fine and QDROs will be entered without problems. However, sometimes clients will have lost rights to retirement benefits they would have received if the attorney drafting the Judgment had been more careful. Or there may be ambiguities about how the plan should be divided that require further litigation to resolve.


The first thing to do is to identify the type of retirement plan involved, different types of plans have very different restrictions. It is wise to use different language in the MSA depending on the type of plan.

A. Corporate or union pension and 401(k) plans – The federal Employee Retirement Income Security Act [ERISA] protects these plans against alienation. ERISA only allows an interest in a protected plan to be transferred pursuant to a state court order providing for division of marital property or support that is “qualified” under ERISA and that does not require the plan to provide any greater or different benefit than it would provide to the plan participant.

There are two major categories of plans: defined contribution plans and defined benefit plans. A defined contribution plan may be called a 401(k) plan, a stock retirement plan, an Employee Stock Ownership Plan, or something similar. Upon retirement the employee receives whatever has been paid into the plan on his or her behalf, plus or minus any gains or losses. It is fairly straightforward.

A defined benefit plan is usually called a pension. A defined benefit plan is a promise by the employer to pay the retired employee some amount per month for the rest of his or her life. The amount is usually based on a formula involving the length of employment and final salary. These plans vary widely and can be very complex. Often a defined benefit plan can be divided by either a “shared interest QDRO” or a “separate interest QDRO.” In a “shared interest” QDRO, the non-employee ex-spouse [alternate payee] starts receiving benefits whenever the participant retires and starts receiving benefits. The benefit to the alternate payee ends when the participant or the alternate payee dies. In a “separate interest” QDRO, the plan administrator establishes a separate account for the alternate payee with a share of the value of the participant’s benefit and makes actuarial adjustments to make payments to the alternate payee for the rest of his or her life. Typically the decision which type of QDRO to use is made based on the client’s wishes when drafting the QDRO. If offered the choice, most clients will opt for the “separate interest” QDRO so they are guaranteed benefits for their life. But some other types of plans described below do not give the client the choice.

B. State or local government pensions – They cover a lot of people, including state employees, teachers, policemen, firemen, judges, and state legislators. These pensions are not covered by ERISA. Until 1999 these pensions could not be divided at all. In 1999 the Illinois legislature authorized limited division by a Qualified Illinois Domestic Relations Order [QILDRO]. In 2006 the legislature expanded what can be done with a QILDRO. But it is still limited compared to what you can do with private pensions. The court can only divide monthly payments while the member receives benefits. There is no survivor benefit for the alternate payee and only a very limited death benefit. You do not have the option of a “separate interest” QILDRO.
The Illinois statute states that disability benefits cannot be divided by QILDRO. This is of special concern for spouses of fire and police personnel who often are, or can claim to be, injured on the job. The member can choose to stay on disability as long as he wants rather than taking his pension. But see IRMO Schurtz. In Schurtz a 62 year old fireman went on disability after a QILDRO was entered. There are tax consequences and insurance consequences in receiving disability pay, but he apparently preferred them to paying half his pension to his ex-wife. The Third District Appellate Court, however, said he could be ordered to make direct payments to his ex.

C. Federal civil service retirement plans [FERS and CSRS] and Thrift Savings Plan [TSP] -- They have their own requirements. The federal government has issued detailed regulations with model wording for different situations and rules for interpretation. The order dividing a pension is called a “Court Order Acceptable for Processing” [COAP] instead of a QDRO. A separate interest order is not allowed, but the order can require a surviving spouse annuity to protect the alternate payee if the member dies first.

D. Military Pensions -- Separate federal law governs military pensions. The benefits to an ex-spouse are limited.
There is a10/10 requirement. For the military to make direct payments from a pension, the parties must have been married for at least 10 years during which the service member performed 10 years of creditable service. Note that even if this requirement is not met, a court can order the service member to make direct payments to the spouse as a division of marital property.

The military will not accept a separate interest order. The only way for an alternate payee to receive payments after the member dies is if the member elects Survivor Benefit Plan [SPB] coverage. Attorneys often order the military pension be divided but neglect to order that the member elect the SPB. If the SPB is not mentioned in the judgment, the alternate payee has a difficult time later arguing the member should provide this additional benefit. Even if SBP coverage is required in the judgment, the service member must file an election with the military within one year of the divorce or the benefit is permanently lost The alternate payee should protect herself by submitting a “deemed election” within a year by filing a Form DD 2656-10.

The military deducts the entire cost of the SBP before dividing the pension. The service member may feel it is unfair that he or she should bear half the cost of the SBP which only benefits the other party.

Active duty military pensions are usually divided by a coverture formula using years of service; but Reserves pensions are calculated by points earned each year. Dividing the pension using a formula based on years of service rather than points earned would be unfair, usually to the service member.

Attorneys should be aware a service member with a service-related disability may elect to waive retired pay and take disability instead; the military will not make payments from disability pay. The alternate payee’s attorney may want to provide in the judgment that if the pension is reduced because of disability payments, alternate payee will receive an equivalent amount from the pension.

E. IRA accounts – These accounts are not governed by ERISA. Therefore a QDRO is not required. The parties should be able to transfer them by a simple Letter of Direction. A separate court order is not required.


A. The Forgotten Plan – The alternate payee’s attorney should investigate and refer to all retirement plans in the judgment. Many employees have several retirement plans. Most major corporations have both a defined benefit plan and a defined contribution plan. For example, virtually all Abbott employees participate in both the Annuity Retirement Plan (a pension) and the Stock Retirement Plan (a 401k plan). Many union members, such as local electrician and plumbers’ union members, participate in both a pension and 401(k) plan. Highly paid corporate executives may have several additional “non-qualified” plans. Small companies are likely to have only a 401(k) plan.

Many Illinois public sector employees choose to put money in a 457 plan, which is very like a 401(k) plan and can be divided with something similar to a QDRO. Federal government employees, both civilian and military, can chose to put money into a Thrift Savings Plan. The TSP can be divided with an order similar to a QDRO.

But what if the attorney missed a retirement plan? Is there anything he can do besides calling his malpractice carrier? There may be a “Get Out of Jail Free Card.” See IRMO Hall and IRMO Hendy. These two recent Second District cases provide a possibility of relief. They state that MSAs are contracts and interpretation is a matter of contract law. The court is to try to ascertain the intent of the parties. If it is clear from the MSA the parties intended to divide all retirement plans, the court will allow division even if the plan is not specifically mentioned. The attorney can save a lot of headaches by adding to the marital settlement agreement a statement that the parties intend to divide the retirement accounts equally. Or the attorney can ask that question at the prove-up hearing. “Have you agreed to divide all marital retirement assets equally?”

B. In the marital settlement agreement, don’t say the spouse shall receive half the pension if what is intended is half of the marital portion of the pension.

C. But what is the marital portion? This is a frequent argument. Pensions are usually divided using a coverture formula, sometimes called the Hunt formula. But you have to distinguish a coverture formula from a “frozen” coverture formula. For example, Abbott provides a model QDRO that has a frozen coverture formula. The model would set up two separate accounts as of the date of the divorce. The alternate payee would receive a separate interest pension based on the value at date of divorce. The alternate payee, however, probably wants to apply the coverture formula as of the date the participant retires, when the value of the pension will be higher. Abbott will accept the latter coverture formula. I think an alternate payee’s attorney risks malpractice if he divides the pension as of the date of the divorce.

Recent Illinois appellate court cases have established a clear preference for a regular coverture formula over a frozen coverture formula. To understand the difference between the two approaches, read IRMO Richardson, a 2008 First District Appellate Court case. It involved a fire fighter pension; both parties had experts testify to the values of the pension and the court did a good job of explaining the difference between the two approaches. In that case the difference between the two formulas was $487 a month for the rest of the member’s life.

It is often hard to convince the pension plan member that the pension should be divided based on the value as of the time of retirement rather than as of the time of the divorce, but it is fair. At the time of the divorce, a valuation is just a hypothetical number with little connection to the value at the time of retirement. The alternate payee cannot get his or her money at the time of the divorce – if the value is frozen, they lose the appreciation and accumulated interest until the time they can actually get the money. And the participant would not receive the benefit of the highly paid final years without the less highly paid early years they shared with the alternate payee. In the end all of the years are compensated based on the final salary.

Some companies are converting pension plans to escape liability for funding the pension. Motorola and FedEx, for example, have converted to what they call a “portable pension.” It is more like a 401(k), in that the member only receives the benefit that can be purchased with the contributions. The difference is the company is not funding a formula for payments. Depending on the terms of the plan, an alternate payee may or may not be able to cash out their interest immediately. Older employees may have a pension that is a combination of both.

D. Mixed 401(k) – A 401(k) may be part marital and part non-marital. How do two litigious people resolve which is which? Say the participant had 100,000 in a 401(k) at the time of their marriage 15 years ago. The participant argues reasonably that he is entitled to the 100,000 plus any earning and appreciation. The plan may have changed financial managers several times in the intervening years and probably cannot trace the earnings and appreciation on the initial amount. The parties could use a ratio of pre-marital contributions to marital. But the contributions may be hard to trace. They could divide the plan by a coverture formula using length of marriage. They could hire an actuary to come up with an estimate. But there no way to arrive at an exact number.


A. Warn the client to enter the QDRO as soon as possible. They need to do it before the participant spouse dies. Otherwise the alternate payee is likely to get nothing. While there is an argument that the plan should honor a nunc pro tunc QDRO, it is hard to sell this to the plan, particularly if the plan gets to keep the money.

Enter the QDRO before the member spouse retires so that the client is not in the position of trying to collect back benefits from the spouse.

B. A QDRO is going to take time to implement. QDROs can help clients who are short on cash. It is often attractive to agree to transfer the 401(k) to the non-employee spouse to cash out and pay the marital debts [and of course the attorneys]. Normally there are only limited circumstances where the employee can cash out a 401(k). Even if they are able to cash it out, they have to pay income tax at their marginal rate plus a 10% early withdrawal penalty. Internal Revenue Code section 72 waives the early withdrawal penalty if an alternate payee cashes out an award pursuant to a QDRO. The recipient still has to pay income tax, but probably at a lower tax rate. Be sure to gross up the amount to withdraw to cover the taxes. Most 401(k) plans now will allow immediate withdrawal, but it is a good idea to verify. The alternate payee probably will not get a check for three or four months.

C. Do not provide in the judgment that one attorney will represent both parties in preparing QDROs. It is a conflict of interest. With a 401(k) plan actual conflict may not be a big risk, but it certainly is with a pension.

1. Based on a presentation to the Lake County Bar Association Family Law Seminar, October 21, 2011
2. 891 N.E.2d 415 (3rd Dist. 2008).
3. 935 N.E.2d 522 (2nd Dist. 2010).
4. 949 N.E.2d 716 (2nd Dist. 2011).
5. 884 N.E.2d 1246 (1st Dist. 2008).