A qualified domestic relations order (QDRO) is a court order or decree that requires a portion of a retirement plan to be transferred to a spouse or dependent, usually used during a divorce. A QDRO gives the plan administrator the authority to divide the retirement account. QDROs are not mandated by the court and are not part of every divorce. However, if you or your spouse own a retirement account, you may need to understand the QDRO process. 

Below, we discuss the need for QDROs, explain how they work, and describe what must be included in a QDRO. 

Why Do QDROs Exist?

Retirement plan administrators owe a fiduciary duty to retirement plan participants. They cannot automatically split up a retirement account following a divorce. They must have a valid qualified domestic relations order in place before they can make such distributions. A QDRO provides the right for an “alternate payee” to receive distributions from the retirement account. Additionally, QDROs provide a method for plan participants to distribute plan funds to their spouse without incurring taxes.

QDROs are used for ERISA plans, such as 401(k)s and 403(b)s.

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How To Get A QDRO

Plan administrators must follow strict procedures to determine the qualified status of domestic relations orders and how to distribute plan funds pursuant to these forms. QDROs often have long standing consequences. For these reasons, it is usually preferable to have a qualified lawyer to help draft a QDRO. Many plans have their own QDRO form, but a lawyer can apply the law to determine how much of the plan is subject to division and how to complete the form.

QDROs are often made part of the divorce decree or property settlement. However, a QDRO can also be a stand-alone separate judgment, decree, or order. 

How Is A QDRO Paid Out?

The QDRO describes the amount of money that will be paid to the non-participant spouse and how. Many QDROs use the separate interest approach in which the QDRO specifies the percentage or dollar amount that will be paid to the ex-spouse. The amount of money paid out during the divorce settlement is limited to the contributions during the marriage. Often, 50% of the increased value of the account is provided to the non-participant spouse.

The spouse may receive the payments in a lump sum or in installments, as the QDRO specifies.

Information That Must Be Included in a QDRO Form

QDROs must comply with the Employee Retirement Income Security Act (ERISA) and the domestic relations laws in the state where the divorce takes place. ERISA requires that the following information be included to meet the definition of a qualified domestic relations order:

  • The name and last known mailing address of the participant and each alternate payee
  • The name of each plan the QDRO is designed to cover
  • The dollar amount or percentage of the benefit to be paid to the alternate payee
  • The number of payments or the time period to which the order applies
  • Whether any QDRO survivor benefits will apply if the participant denies and what happens in the event of death of the alternate payee
  • What happens if the retirement plan is terminated

There may be additional QDRO requirements based on state law.

What Can Be Included In A QDRO

The most important information to include in a QDRO is what amount or percentage of the plan will be allocated to the non-participant spouse and how these benefits will be paid out. Some QDROs include detailed information about the benefits, including the reason for the benefit and its payment duration.

There are also limitations of a QDRO, such as:

  • The QDRO will not transfer assets listed under it that are already promised to another alternate payee under another valid QDRO
  • The QDRO does not pertain to or effect benefits that are not part of the participant’s current plan
  • The QDRO cannot provide an alternate payee with any option that is not provided under the plan
  • The QDRO cannot require a plan to pay benefits to an alternate payee in the form of a qualified joint and survivor annuity for the life of the alternate payee and their future spouse

Does a QDRO Expire?

A QDRO does not expire. However, it should be implemented as soon as possible. Many states allow QDROs after divorce. It can take some time to complete the QDRO process and for the plan administrator to distribute the non-participant spouse’s portion to them. The spouse cannot access these funds until the process is completed.

Can QDROs Be Changed?

QDROs are not typically changed. However, if a change is necessary, the spouse wanting the change can ask for the QDRO to be amended by getting the other spouse to agree to the change or petitioning the court to amend the QDRO. The plan administrator will have to review any new plan and approve them.

QDRO Tax Implications

According to the Internal Revenue Service, the spouse who receives QDRO benefits from the retirement plan reports them on their tax return like they were a plan participant. If a QDRO distribution is made to a child or dependent, the plan participant is taxed.

However, it may be possible for a person who receives a distribution from a QDRO to roll over these benefits tax-free. An attorney can help with the transaction to minimize the potential tax liability.

Additionally, no QDRO early withdrawal penalty is imposed if a spouse transfers retirement funds to their spouse through a QDRO. As long as the recipient spouse puts the funds into another retirement account, they are not taxed on the funds. However, if they receive a distribution, they will be subject to income taxes and an additional 10% tax on the distribution amount if they are under 59 ½. 

Who Can Prepare a Qualified Domestic Relations Order?

It is often preferable for a lawyer to prepare a QDRO. If someone is representing themselves, they can contact the plan administrator for the QDRO form for the plan. Any state agency or entity with the authority to issue judgments, decrees, or orders can issue a QDRO.

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