What is a Qualified Domestic Relations Order (QDRO) and what does it do?
It might sound like shorthand for something your teenager would text, but understanding what a QDRO is and how it affects a successful retirement is critical to your clients moving forward.
A qualified domestic relations order is the document that splits it all—including 401(k)s. More to the point, 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 dependent of a participant.
The 401(k) plan administrator must also approve the QDRO after determining it is in compliance with the federal government requirements. Longer life spans make it increasingly crucial, as couple’s are splitting later in life. The 401(k) is often their largest retirement asset and therefore features prominently in the proceedings. A retirement plan advisor is not only ethically bound to help when asked, but not doing so could result in legal exposure of their own.
The QDRO must contain certain specific information, such as:
- The participant and each alternate payee’s name and last known mailing address , and
- The amount or percentage of the participant’s benefits to be paid to each alternate payee.
A QDRO may not award an amount or form of benefit that is not available under the plan.
A spouse (or former spouse) who receives QDRO benefits from a retirement plan reports the payments received as if he or she were a plan participant. The spouse is allocated a share of the participant’s cost (investment in the contract) “equal to the cost times a fraction,” according to the IRS. The numerator of the fraction is the present value of the benefits payable to the spouse or former spouse. The denominator is the present value of all benefits payable to the participant.
A QDRO distribution that is paid to a child or other dependent is taxed to the plan participant.
An individual may be able to roll over tax-free all or part of a distribution from a qualified retirement plan that he or she received under a QDRO. If a person receiving QDRO payments is either the employee’s spouse or former spouse (not as a non-spousal beneficiary), then he or she can roll it over, just as if he or she were the employee receiving a plan distribution and choosing to roll it over.
NEWSMAX’s Jerry Shaw makes an important point about when to file, which is to say, immediately.
“It is recommended that spouses file for the QDRO as soon as possible during divorce proceedings,” he writes. “Death or retirement before the plan administrator approves the QDRO could mean the spouse loses the right to the 401(k) plan benefits.”
See Also:
- The Break-Up: Senator Looks to Improve Women’s Retirement Outlook
- Gray Divorce: The Great Retirement Plan Disruptor
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.