What Is a Qualified Domestic Relations Order (QDRO)?

What Is a Qualified Domestic Relations Order (QDRO)?

A qualified domestic relations order (QDRO) is a legal document typically found in a divorce agreement. It recognizes that a spouse, former spouse, child, or other dependent is entitled to receive a predefined portion of the account owner’s retirement plan assets.

How Does a QDRO Work?

According to the Internal Revenue Service (IRS), a spouse or former spouse must report the QDRO benefits received “as if he or she were a plan participant.” The QDRO grants the spouse a percentage of the participant’s investment in the contract, with the numerator being the present value of the benefits payable to the spouse and the denominator being the present value of all benefits payable to the participant.

Once the distribution is made, the former spouse becomes responsible for any taxes due. The former spouse can, alternatively, roll over the assets received from a QDRO just the same as an employee could receive a distribution and roll it over into another retirement account. However, a QDRO distribution that is paid to a dependent, such as a child, is taxed to the plan’s participant.

If there is no QDRO in place and the retirement account plan holder distributes retirement plan assets to a former spouse, the account holder will generally be responsible for income taxes on the distributed amount, as well as any early withdrawal penalties if they are under age 59 1/2.

QDRO Requirements

A QDRO is only valid for retirement plans covered by the Employee Retirement Income Security Act (ERISA). This includes qualified plans, such as 401(k)s. They do not cover IRAs.

To be valid, a QDRO must contain specific information:

• Name and last known mailing address of the plan participant and each payee
• Name of each plan to which the order applies
• Dollar amount or percentage of the benefit to be paid
• Number of payments or time period to which the order applies

The QDRO cannot award an amount or form of benefit that is not available under the participant’s specific retirement plan. Retirement benefits from more than one retirement benefit plan can be subject to a QDRO as long as it clearly states the benefits that are assigned to the former spouse. The provisions in a QDRO are not standardized and will vary based on the retirement plan type and the purposes of the order.

Limitations of a QDRO

Rules imposed by the U.S. Department of Labor’s Employee Benefits Security Administration restrict specific provisions from being included in a QDRO. The court order cannot force a retirement plan to disburse any benefit amount or option that is not provided through the plan. In addition, the QDRO cannot require increased benefits, on the basis of actuarial value, from the retirement plan.

Benefits cannot be required from a plan for an alternate payee when those benefits are already allocated to another alternate payee under the decree of a previous QDRO. For example, in the instance of subsequent divorces and QDROs, the earliest takes priority for the designated benefit amount.

Survivor Benefits

Additionally, the order must not require the plan to pay the alternate payee in the form of a qualified joint and survivor annuity (QJSA) for the lives of the alternate payee and their subsequent spouse.

A QDRO may provide surviving spousal benefits to a former spouse under the plan. Benefits allocated to an alternate payee under a QDRO are not available for a subsequent spouse to receive as survivor benefits under the retirement plan.

Other QDRO Beneficiaries

In some cases, a QDRO might be put in place for a relation other than a former spouse. Dependents might also qualify to receive the ordered benefits. In such instances, the alternate payee is a minor or is determined to be legally incompetent. The order can require the benefit plan to make payment to an individual with legal responsibility for that payee. This can include a guardian as well as a trustee who serves as the agent of the individual.

The plan administrator who oversees the retirement benefits subject to the order will determine if a QDRO is a qualified domestic relations order. In these circumstances, plan administrators are then responsible for ensuring that their duties are fulfilled on behalf of plan participants and beneficiaries.

The Bottom Line

A QRDO is used to divide retirement plan assets in a divorce. It can only be used for retirement plans covered by ERISA. This includes qualified plans, such as 401(k)s, but not IRAs. Typically filed by an ex-spouse, a QRDO must be approved by both the plan administrator and a court.

While QDROs have specific requirements, they are not standardized. Each varies based on the type of retirement plan, how assets are paid, and whether or not there are dependents, among other nuances.