As if there aren't enough regulations, legal terms and documents to understand when divorcing, we have yet another that may be worth learning if you or your spouse have one or more retirement accounts and are interested in getting divorced.
What is QDRO, and do you need it?
A QDRO (Qualified Domestic Relations Order) recognizes and outlines an alternate payee's right to receive a predetermined amount an account owner is set to receive from his/her retirement plan assets.
It can become part of a divorce decree or created and enforced as a separate order, judgement or decree. QDRO can be done after the final judgement has been established.
Alternate payees may include a spouse, former spouse, child and/or other dependent.
Why do you need one?
- While the MSA (Marital Settlement Agreement) is included in or alongside the Final Judgement of Divorce, it typically only specifies a percentage of retirement assets to be distributed to each party.
- Unless a QDRO is in place, a retirement plan administrator cannot automatically distribute the participant's funds to another party following divorce.
- It assists in a more efficient process for said distribution.
Does a QDRO apply to all retirement plans?
A QDRO is specific to 401(k)s, 403(b)s, and other qualified retirement plans which are employer-sponsored plans meeting requirements set forth by the Internal Revenue Code and the Employee Retirement Income Security Act, making them eligible for certain tax benefits. Other qualified retirement plans may include traditional pensions and profit-sharing plans.
A QDRO does not apply to IRAs which require a process referred to as "transfer incident to divorce".
Based on the state in which your divorce is processed and whether it is a Community Property State or and Equitable Distribution State, property laws may affect how a couple's assets and debts are divided and therefor the application of rules associated with retirement accounts. Consult a local, family law attorney for more details regarding how such laws can affect your case.
How does the IRS define the use of a QDRO?
According to the Internal Revenue Service (IRS), a QDRO is “a judgment, decree, or order for a retirement plan to pay child support, alimony, or marital property rights to a spouse, former spouse, child, or other dependents of a [retirement plan] participant."
For more information and to understand how a QDRO may affect you, refer to your divorce and/or tax attorney and the IRS (https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-qdro-qualified-domestic-relations-order).
What is ERISA as it applies to a QDRO?
A QDRO must comply with the Employee Retirement Income Security Act (ERISA) and the domestic relations laws within the state that has jurisdiction. ERISA (The Employee Retirement Income Security Act of 1974) is a federal law that sets minimum standards for most employer-sponsored retirement and health plans to provide protection for individuals in these plans.
QDRO's are only specific to pension plans and/or employee benefits subject to ERISA.
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