What is a Qualified Domestic Relations Order (QDRO)?
[Updated 4/8/24]
When a marriage ends, all marital property must be divided equitably amongst both spouses. While often overlooked, retirement benefits accumulated during the marriage are also considered part of that property. This means an ex-spouse can be entitled to a portion of the former spouse's retirement plan. For many couples, their retirement plan is their largest asset.
Simply agreeing to split a qualified retirement fund is not enough to ensure this is done. An order must be drafted to ensure the retirement administrator honors the marital settlement agreement or court order. The order that specifically provides for this is known as a qualified domestic relations order (QDRO).
A QDRO is not something you want to tackle yourself, as mistakes can be costly down the road. The QDRO must also align with the terms in the divorce decree for property division address other issues not included in the decree such as survivor benefits, and follow the rules of the particular retirement plan.
If you are in the midst of a divorce and are concerned about the handling of a qualified retirement or pension fund, you should speak with a taxation attorney experienced in drafting qualified domestic relations orders, and you should do so before signing a marital settlement agreement.
What Is a QDRO?
A domestic relations order is a court order, judgment, or decree for marital property rights, alimony, or child support. A qualified domestic relations order (QDRO) is a domestic relations order recognizing another person, such as a former spouse, child, or dependent as an “alternate” or “alternative” payee to a retirement plan. The alternative payee can receive a portion of the employee’s benefits under the retirement plan. For federal employees, the comparable document is called a “Court Order Acceptable for Processing” (COAP).
QDROs were established under federal law, specifically the Employee Retirement Income Security Act (ERISA), as an exception to the general rule that a person's retirement plan cannot be assigned. Without a QDRO, financial institutions and administrators of retirement accounts will not honor a family court order dividing retirement benefits payable to the retirement plan participant. Even if divorce proceedings include a divorce decree dividing a spouse's retirement plans, the defined benefit plan administrator ignores the court order until it receives a qualified domestic relations order (QDRO). A well-drafted marital settlement agreement may be sufficient for a defined contribution retirement plan.
Retirement Benefits Payable to a Former Spouse Under QDRO Orders
You need qualified domestic relations orders for a property settlement that includes retirement accounts including:
Pensions
Defined benefit plans are retirement assets that pay the plan participant monthly benefits at a future date in a yet-to-be-determined amount. A QDRO typically states that the former spouse is entitled to a portion of the participant's benefits if and when they become available. The order includes a mathematical formula the financial institution should use to divide the pension payments. Pension plans oftentimes provide options regarding survivor benefits and permit each spouse to choose the timing of receiving benefits.
Individual Retirement Account
An individual retirement account (IRA) is not associated with your employment. Its present value is known, but its future value is not. Therefore, the financial institution may allow the division of an IRA with a well-drafted divorce decree instead of a separate QDRO. However, some financial institutions may still require a QDRO to divide an IRA because there are more factors to consider than simply stating the percentage or fixed dollar amount to be paid to the former spouse.
401(k) Account
401(k) accounts are popular retirement plans because they allow an employee to contribute to the retirement plan on a pre-tax basis. Additionally, many employers contribute to the account for their employees. As with an IRA, the “current” value of the retirement plan is known. QDRO benefits payable to the former spouse may be a fixed amount or percentage of the account, but again, there are other factors to address such as the valuation date, earnings after the valuation date but before the withdrawal date, loans from the account, etc.
Thrift Savings Plan (TSP)
TSPs are similar to 401(k) accounts but for federal government employees. Instead of a QDRO, a certified “Retirement Benefits Court Order” (RBCO) is the appropriate document for dividing a TSP between spouses. The Office of Personnel Management that processes COAPs and RBCOs is exacting and will not pre-approve claims before filing with the court or offer advice in completing the forms.
It Is Not a Domestic Relations Order
A domestic relations order is not necessarily a QDRO. A domestic relations order is issued by a court, or a state authority, with the mandate to make orders and decrees, or to execute marital settlement agreements. This means the court or state agency can either make an order or decree dividing the retirement plan or it can execute a plan developed by the divorcing parties, drafted by an attorney, and approved by the pension plan's administrator.
For the domestic relations order to qualify as a Qualified Domestic Relations Order, it must meet a number of requirements specific to the retirement plan. Plan administrators provide information about the terms that must be included in a QDRO to be approved by the company. However, some standard terms are required in all QDROs.
A QDRO Must Include Specific Information Including:
The name of the plan participant (retirement plan vested owner)
The names of each alternate payee (former spouse, child, or other dependent)
The last known mailing address of the plan participant and each alternate payee
The specific information to identify the retirement plan that is the subject of the QDRO
The amount or percentage payable to the alternate payee from retirement assets
The number or time period for the payments made to the alternate payee
The Domestic Relations Order Must Not:
Require a qualified retirement plan to provide an alternate payee with a retirement benefit or option not provided for in the plan or retirement account
Require a plan to pay increased benefits
Require a plan to divert payments from one alternate payee in a previously approved QDRO benefits order to a new alternate payee
Require a plan to pay the ex-spouse and his or her future spouse qualified joint and survivor benefits for the rest of their lives.
If the retirement plan administrator does not qualify for the court’s Domestic Relations Order, the draft QDRO must be corrected and resubmitted to the court for approval before returning to the retirement plan administrator. Qualified domestic relations orders are technical documents and any error or ambiguity in the order could result in the plan administrator rejecting the QDRO.
Tax Consequences of Dividing Retirement Plans in Family Court Orders
A legally valid QDRO can transfer money from a defined benefit retirement account to an alternate payee without the 10% early withdrawal penalty. However, the QDRO does not eliminate income taxes owed on withdrawals from a retirement account.
The alternate payee is responsible for income taxes owed on QDRO benefits payable to them. A payee generally will be able to roll over the amount they receive into a qualified retirement account to defer taxes on benefits payable by a QDRO. However, pension payments from a Defined Benefit Plan or a federal/state service plan cannot be rolled into an IRA or another retirement plan and will be taxable upon receipt.
If you cash out proceeds from a defined contribution plan, the plan administrator should withhold 20% for personal income taxes. Depending on your financial circumstances, that amount may be higher or lower than the amount calculated when you file your income tax return for that year. Before you agree to a QDRO distribution, talk with a Maryland tax attorney to determine the best way to minimize paying taxes on a QDRO distribution.
A QDRO for a Retirement Plan Must Be Carefully Crafted
Many considerations go into creating a QDRO. One is the type of plan involved. Is it a defined benefit plan where the employer provides funding directly? Or is it a defined contribution plan where the employee personally contributes?
Additional considerations include how the plan will be divided. Will it be by separate interest where the participant and alternate payee make their own plan elections, such as when to begin receiving retirement benefits? Or by shared payment where the alternate payee gets a fixed share of the participant's benefits when paid?
There are many factual issues to consider when splitting one's nest egg. Avoid jeopardizing your future income by talking with experienced taxation and estate planning lawyer Stephen Thienel. Mr. Thienel has decades of experience helping clients in developing qualified domestic relations orders in Maryland, Virginia, and the District of Columbia.
