What Is a QDRO in a Divorce?

Learn how it can help you divide 401(k) assets in a divorce

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The dissolution of a marriage can create confusion about who gets the retirement plan assets. In most states, your retirement nest egg is considered property that is up for grabs in a divorce.

However, under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code, a retirement plan participant can't assign his interest in that plan to someone else unless a court orders a qualified domestic relations order (QDRO), in which case a participant may have to assign a portion of his employee retirement plan assets to a spouse, ex-spouse, child, or another dependent known as an alternate payee to meet family support or marital property obligations. The payment terms depend on the retirement plan and the QDRO.

If you are divorcing a spouse, you'll need a QDRO to be entitled to that spouse's retirement plan assets. Understanding a QDRO can ensure the smooth division of 401(k) or other retirement plan assets in a divorce.

Basics of a QDRO in a Divorce

A QDRO is an order drafted in a specific way that recognizes an alternate payee for the assets within the account. In other words, it's a document that guarantees that more than one person will benefit from the retirement plan assets.

To count as a QDRO, an order must:

  • Be a judgment, decree, or order that a state agency issues or a property settlement that the state approves.
  • Comply with state domestic relations law and the ERISA.
  • Relate to child support, alimony, or marital property rights that would benefit a spouse, former spouse, child, or another dependent of a retirement plan participant. 

As a domestic relations order, a QDRO is as serious as child support, alimony, or any other property granted to each spouse in a divorce. Moreover, it can be issued either as part of a divorce decree or property settlement or as a separate order.

Special Rules for QDROs

There are a few important things to know about a QDRO in a divorce.

Regardless of your age, money withdrawn from a retirement plan under a QDRO is not subject to the typical 10% early withdrawal penalty fee. Ordinarily, withdrawals that you take from a retirement plan before age 59.5 are considered early withdrawals and are subject to the 10% penalty. Therefore, if you withdraw assets from a retirement plan that is not under a QDRO, you would be on the hook for the penalty. You could easily face hefty penalty charges by making this simple QDRO 401(k) mistake. 

The alternate payee must be a spouse, ex-spouse, child, or another dependent. Other alternate payees will not be considered.

The document must be structured in a certain way to be considered valid. It must include:

  • The names and mailing addresses of the plan participant and the alternate payee
  • The name of each plan under the QDRO
  • The dollar value or percentage of the plan assets going to the alternate payee
  • The number of payments included in the order and the time period of the order

Moreover, the order must be verified as a QDRO by the plan administrator to be considered valid under federal law. Once approved, the plan administrator executes the plan within the QDRO. The plan administrator will notify the alternate payee of the order, along with its validity and instructions. The timeline for the actions will also be outlined.

The QDRO can't require a plan to pay an alternate payee any type or form of benefit that the plan doesn't otherwise provide.

Drafting a QDRO in a Divorce

If you are divorcing, start by asking for more information about QDROs through the administrator of your 401(k), 403(b), 457(b), defined benefit pension, or related retirement account (not including IRAs). Under the ERISA, all retirement plans have to include instructions for evaluating whether domestic relations orders are QDROs and for distributing plan assets under QDROs.

Your plan administrator may offer a standard form used by the plan that's free and easy to fill out on your own. However, using one of these "model" forms isn't required to obtain QDRO status. An attorney can also draft a QDRO on your behalf, which may be worth the added expense if it provides some assurance that the order will be done correctly. Consult the Department of Labor's QDRO frequently asked questions to better understand some of the legal specifics of the order.

As for how to divvy up 401(k) assets through a QDRO, there is no one-size-fits-all approach; it all depends on the type of retirement plan, the type of benefits afforded under the plan, and the reasons for the division. As an alternate payee, you may be entitled to some or all of the participant's benefits under a retirement plan.

One approach for dividing QDRO 401(k) or other retirement plan assets is the “shared payment” approach. If you go with this option, you as the alternate payee won't get your payments until the participant gets her payment. This option makes sense if you are drafting a QDRO after the participant has already started to receive her plan assets. However, a more common approach when dividing assets in a divorce is a "separate interest" approach where benefits get split into two separate parts, and the time and form of the payment that the payee chooses may be different from what the participant chooses.

In addition, QDROs may set forth different guidelines for how to distribute retirement benefits normally versus survivor benefits that are distributed when the participant dies.

Federal law doesn't require either of the above two approaches for asset division. Ultimately, it's up to the QDRO drafters to divide plan assets in a way that meets their objectives.

Receiving Distributions Under a QDRO

If you have received or expect to receive retirement plan assets through a QDRO, the plan may afford you one or more options for how you take your portion of the distribution as the payee:

  • Take the money as a lump sum. This would amount to the full amount you are entitled to under the QDRO. However, you would have to pay taxes on it today. If, however, the payee is a child or another dependent, the plan participant instead of the payee gets taxed. 
  • Take the money as an annuity. You would receive your portion in installments using this approach, which can help spread out your tax burden.
  • Keep the money in the qualified retirement plan. If you can afford to wait, the better move may be to leave the money in the QDRO 401(k) or another plan so that the assets can continue to grow tax-deferred until retirement.
  • Leave the money in the spouse's plan but retain the ability to invest your portion as the alternate payee as you choose. You would have to draft the QDRO to specify this request.
  • Move the money into a rollover IRA. This option would keep the assets tax-deferred and completely under your control.

Article Sources

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