What is a Qualified Domestic Relations Order (QDRO)?

Instructor: LEROY (Bill) RANDS

Bill has taught college undergraduate and MBA classes in finance, economics & management, 40 years of finance experience and has a MBA degree.

Questions in a divorce could include: What happens to my husband's retirement plan? Do I get a piece of it? A qualified domestic relations order (QDRO) is a document approved by a judge that gives a spouse a portion of her husband's retirement plan.

Qualified Domestic Relations Order (QDRO)

A qualified domestic relations order, also known as a QDRO, is a judgment or court order requiring a retirement plan to divide a retirement account in order to pay child support, alimony or marital property rights to a spouse, former spouse, child or other dependent of the participant. Most employer retirement plans are qualified retirement plans under IRS regulations and the assets are not taxable until the participant takes a distribution, so there are financial considerations to dividing a retirement account under a QDRO. A QDRO can also be used as a financial tool to plan for retirement.

Different Plans

There are many different kinds of retirement plans, and the QDRO must be drawn to fit the particular retirement plan. For instance, there are defined benefit plans that promise a monthly payment for life after retirement. There are defined contribution plans like 401(k)'s, where the participant puts in funds that are often matched by the employer. There are federal government civil service plans, state retirement plans, union plans, etc. The plan documents stipulate when and how distribution of funds will occur. The QDRO has to conform to the plan document.

John has worked for XYZ for over 25 years and is a participant in XYZ's retirement plan, which is a defined benefit plan. Molly, his wife, is suing for legal separation from John. Molly's attorney gets a QDRO dividing the retirement plan benefits equally. However, the defined benefit plan only pays a monthly retirement payment, so Molly will have to wait until John retires to get any distribution from the plan.

Mary, on the other hand, is enrolled in Elite Corp's 401(k) and she and Steve are going through a divorce. Steve gets a QDRO for half of Mary's 401(k) account. The administrator by court order will set up an account in Steve's name and transfer half of Molly's assets into that account. Since Steve is not an employee, he could have the plan transfer his account to another qualified retirement plan or have it distributed to him and he would be responsible for the tax consequences.

The administrator of a retirement plan cannot make special allowances or change distribution rules to enforce a QDRO. The retirement account must be divided according to the QDRO, but the divided accounts still are subject to the plan rules regarding investment and distribution rules to which all plan participants are subject. The administrator cannot make special allowances for a QDRO order.

Different Uses

Retirement plans are part of marital assets and as such have to be considered in the division of assets in a divorce or legal separation. A QDRO could be used for its basic function of just dividing spousal assets. However, it could also be used as a way to provide alimony to a wife or child support for the children in the marriage.

A QDRO could also be used by a husband and wife as they approach retirement to just divide his or her retirement account between the two of them for tax and financial planning reasons.

Harry and Sally are breaking up and getting a divorce. Harry has been contributing to his 401(k) at work for 30 years and has a significant balance and is the major asset for the couple. However, Harry's job does not pay enough for him to pay alimony to Sally and still support himself when they become two separate households after the divorce.

Harry and Sally negotiate a split of the 401(k) account, which will provide Sally a reasonable alimony after the divorce becomes final. The QDRO will provide for the split of the account and Sally can immediately have monthly distributions from her account for her support.

The QDRO can provide the flexibility to divide retirement plans that are part of the marital assets for the best use of the parents and other children of the union in a divorce or legal separation, or just for financial planning purposes.

Financial Planning

Retirement plans, including both company-sponsored plans as well as individual IRAs, are all qualified retirement plans under IRS regulations. This means that the contributions to these funds, as well as earnings in the funds, are not taxable for federal and state income tax purposes until the participant chooses to take a distribution from the fund.

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