Qualified Domestic Relations Order (QDRO)

A Qualified Domestic Relations Order (QDRO) is a court-issued legal order used most commonly in divorce proceedings to divide retirement plan assets. It recognizes that an alternate payee—typically a spouse, former spouse, child, or other dependent—is entitled to receive a specified portion of a participant’s retirement plan benefits.

Key points

• Applies to retirement plans governed by ERISA (for example, 401(k) and pension plans); it does not apply to IRAs.
• The order must be approved by both the court and the plan administrator to be effective.
• Taxes and distribution options depend on how the alternate payee receives the funds.

How a QDRO works

• The court prepares an order specifying the portion of the participant’s plan to be assigned to the alternate payee.
• The plan administrator reviews the order to confirm it meets plan rules and ERISA requirements; only then can funds be transferred or paid.
• An alternate payee who receives a distribution generally reports it for tax purposes as if they were the plan participant. They can often roll the distribution into another qualified plan or IRA to defer taxes.
• If benefits are paid directly to a dependent (e.g., a child), tax rules may treat the distribution as taxable to the plan participant.

Required elements of a valid QDRO

A QDRO must include clear, specific information, typically:
* Names and last known addresses of the plan participant and each alternate payee
* Identification of the retirement plan(s) to which the order applies
* The dollar amount or percentage of the benefit to be paid to the alternate payee
* The number of payments or the time period for which payments apply

The order may address multiple plans, but it must clearly describe the benefit assigned for each plan.

Limitations and restrictions

A QDRO cannot:
* Require a plan to provide benefits, payment forms, or options that the plan does not offer.
* Increase the amount of benefits beyond what the plan provides (for example, by requiring actuarially greater benefits).
* Reassign benefits already committed to an alternate payee under an earlier QDRO that has priority. Earlier QDROs generally take precedence.

Regulatory guidance also limits forcing certain payment forms (for example, plans are not required to provide a qualified joint and survivor annuity to an alternate payee for the lives of that alternate payee and a subsequent spouse).

Survivor and other beneficiary issues

• A QDRO can specify survivor benefits for a former spouse, but benefits already allocated to an alternate payee under a QDRO are not available as survivor benefits for a later spouse.
• If the alternate payee is a minor or legally incompetent, the QDRO can direct payments to a legal guardian, trustee, or other representative.

Who initiates and how payments are made

• An alternate payee (often the ex-spouse) usually files the QDRO as part of divorce or separation proceedings. Attorneys commonly assist in drafting and submitting the order.
• Payment options depend on the plan and the order and may include:
• Lump-sum distribution to the alternate payee
• Periodic installments
• Direct rollover into another qualified retirement account

Taxes and penalties

• If the alternate payee receives the distribution, they are generally responsible for income taxes on that amount, unless they roll it over into a qualified account.
• If the plan participant distributes assets without a QDRO, the participant may be responsible for taxes and potential early-withdrawal penalties if under age 59½.

Bottom line

A QDRO is the primary legal tool for dividing ERISA-covered retirement plan assets in family-law cases. It must meet specific content requirements, conform to plan rules, and be accepted by the plan administrator. Because QDROs involve plan-specific rules and tax consequences, parties often work with attorneys and plan representatives to draft an order that accomplishes the division while complying with applicable regulations.