The Use of Qualified Domestic Relations Orders in Divorce Cases
Retirement assets, such as Individual Retirement Accounts (IRAs) , 401K accounts, or a defined benefit pension are often one of the largest assets held by a married couple. When the marriage of such a couple ends in divorce, the retirement assets must be accounted for and possibly divided.
Dividing retirement assets in a divorce can be complicated and sometimes costly. Cashing out funds in a defined contribution retirement plan, for example, can result in stiff financial consequences such as early withdrawal penalties and higher tax rates. These or other costly expenses can be avoided, however, through use of a Qualified Domestic Relations Order (QDRO). Without a QDRO, federal law does not permit the participant to assign the participant's interest in the retirement account to someone else.
What is a Qualified Domestic Relations Order (QDRO)?
A Qualified Domestic Relations Order (QDRO) is a court order prepared as part of and typically subsequent to a divorce judgment and decree. A QDRO grants one of the divorcing spouses a right to a portion of the retirement benefits earned by his or her former spouse through participation in an employer-sponsored retirement plan, such as a 401K or defined benefit pension. A QDRO may also be used to award spousal support or child support.
A QDRO splits a retirement plan or pension by recognizing joint ownership of retirement assets. The QDRO allows a divorcing spouse, former spouse, child, or other dependent to receive a portion of retirement plan benefits.
A QDRO recognizes an "alternate payee" (an account held by someone other than the "participant" - the person whose name is attached to the retirement account) and guarantees that more than one person will receive the retirement benefits. If the retirement account of one party is then divided as part of a divorce property settlement, or if one party is ordered to pay the other a cash "equalization" payment , they can do so out of their retirement account without paying the early withdrawal tax penalties.
There is a distinction between a "domestic relations order" and a "qualified domestic relations order". Any court can issue a domestic relations order, but a domestic relations order becomes qualified only once it is accepted by the Plan.
When they receive an order purporting to be a QDRO, the Plan's administrator will determine if the order is "qualified" and create a segregated, separate account for the alternate payee. The Plan has specific, written procedures for determining whether a domestic relations order is "qualified" for its purposes.
Division of marital property is governed by state domestic law, but a QDRO must also comply with various applicable federal statutes, such as the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (the Code).
What Are the Requirements of a QDRO?
Before it is even filed with the Court for signature, it is good practice for a QDRO to be reviewed by Plan administrators to ensure its compliance with the terms of the retirement plan, ERISA, the Code, other corporate or company requirements, and other applicable laws. Many plan administrators have form or sample QDROs or booklets/information sheets that can be used by attorneys or that participants can give to their attorneys to use in drafting a QDRO acceptable both to the Plan and to the Court. It is always a good idea to check with the Plan administrator whether such sample QDROs or drafting booklets are available or if the Plan has counsel willing to review a draft QDRO.
The Plan administrator will have specific, written procedures for determining whether a domestic relations order is a QDRO and for administering distributions or divisions . The plan administrator will also be required to notify the plan participant of the receipt of the order and to provide copies of the plan's procedures to determine whether the order is "qualified".
In its basic form, the QDRO identifies the person who earned the retirement benefit as the “plan participant” or simply the "Participant". The person designated to receive a share of the benefit is called the “Alternate Payee.” A QDRO must also contain:
- The name and last known mailing address of the participant and each alternate payee
- The name of each plan to which the order applies
- The dollar amount or percentage of benefit amount to be paid to the alternate payee
- The number of payments or time period to which the QDRO applies
A QDRO cannot require a plan to:
- Provide any type of benefit that is not otherwise provided under the plan
- Provide for increased benefits
- Pay benefits to one payee that are required to be paid to another alternate payee under another QDRO
- Pay benefits in the form of an annuity for the lives of the alternate payee and his or her subsequent spouse