While most people know certain family law terms like “community property” and “visitation“, even if they haven’t been involved in a divorce, they generally haven’t heard the acronym “QDRO” before. It is, though, quite common.
A Qualified Domestic Relations Order or QDRO is a legal tool used to divide retirement accounts. Specifically, it is a court order signed by a judge, which directs the plan administrator of the husband’s or wife’s pension or 401(k) to distribute a portion of those funds to the other spouse. The transfer is accomplished without implicating any penalty or tax payment requirement.
If either spouse accumulated retirement benefits during the marriage, those benefits will be considered marital property (unless a valid prenuptial agreement indicates otherwise). Generally, unpaid retirement benefits accrued before the date of marriage will be considered non-marital or separate property. Non-marital property will not be divided in a divorce.
Likewise, social security benefits, federal railroad retirement benefits, and some government pensions are not considered distributable in a divorce action.
No QDRO is needed if the retirement savings are deposited in Individual Retirement Accounts (“IRAs”). If the parties’ retirement savings is held in a traditional pension (or “defined benefit plan”), a Employee Stock Option Plan (ESOP) or a 401(k) plan (or “defined contribution plan”), the law and the plan administrator will require a QDRO to accomplish the division of funds.
Due to federal regulation of pensions and 401(k)s, there are detailed requirements with which every QDRO must comply to be valid. With the assistance of a valid, approved QDRO, all or a portion of the retirement funds in a pension plan or 401(k) plan can be transferred from the plan participant spouse to the other spouse (now known as the “alternate payee”).
The receiving spouse will actually end up with his or her own separate account. If the participant spouse has a traditional pension, the plan administrator will establish a separate pension benefit for the receiving spouse. If the participant spouse has his or her retirement savings in a 401(k) plan, a portion of the plan funds will be rolled over into the receiving spouse’s IRA, with no tax and no penalty.
Many attorneys outsource the drafting of the QDRO because of the tedious requirements of federal law and of the various plan administrators. Before the judge signs the QDRO, the plan administrator will actually need to approve the language of the Order to ensure that it meets all of the plan’s requirements. If the QDRO doesn’t comply with certain laws, the participant spouse (the one who originally saved the money from his or her income) could be stuck with a tax liability on funds he or she transferred to an ex-spouse.