A Qualified Domestic Relations Order is designed specifically to deal with the distribution of pension funds in divorce. It is often used to establish a former spouse’s or dependent’s legal right to receive a specific percentage of benefit payments or the account balance of a qualified plan. In addition to pension and retirement funds, QDROs can be used in connection with spousal and child support payments.
Requirements for a QDRO
It is not guaranteed that all domestic relations orders will be qualified orders. In order to be considered a “Qualified Domestic Relations Order,” in accordance with the requirements outlined in the Employee Retirement Income Security Act, the QDRO must contain the following information:
- The pension or retirement plan’s name.
- The last known mailing address and full legal name of the owner of the plan.
- The name and address of the person who will be receiving payments (in most cases, the recipient will be a child, former spouse, spouse, dependant family member or an assigned trustee or agent of a designated recipient).
- The method used for the transfer of funds; i.e., whether payments will be made in a series or as a lump sum.
- The beginning and ending dates of payments to be made to the designated recipient.
- Information regarding the establishment of the QDRO in accordance with Section 414(p) of the Internal Revenue Code and state domestic relations laws.
- A complete list of qualified retirement accounts that will be divided.
Once the order is qualified, it will give pension plan or retirement account administrators the legal ability to disburse funds to the designated recipient, usually a child, other dependent or former spouse.
How a QDRO affects taxable income for both spouses
One of the benefits of a QDRO is that it protects the spouse who is making the payments from paying taxes on funds provided to an ex-spouse or a dependent child. Under a QDRO, the spouse who is receiving the retirement funds will be held responsible to pay income tax when he or she receives the funds in the form of withdrawals, pension or annuity. The recipient is allowed to withdraw his or her share and roll the money over into his or her own retirement account or IRA. The recipient’s ability to withdraw will be governed by the terms of the qualified retirement plan.
On the other hand, if there is not a QDRO in place and an ex-spouse withdraws funds from the other’s qualified retirement account, the account’s owner will be required to pay taxes on the withdrawn funds. Additionally, if the account’s owner is under the age of 59.5 – he or she may also have to pay a 10 percent penalty for premature withdrawal.
How a QDRO is drafted
A QDRO can be filed independently or as part of a divorce proceeding. The criteria set by ERISA for a valid QDRO is very specific. In most cases, individuals seek the assistance of an attorney or financial expert to ensure that the QDRO will be enforceable and effective. After the QDRO is drafted, it will be sent to the appropriate family court for its review. The order will become enforceable once it has been approved by the court and filed.
In the midst of a confusing and emotionally charged divorce process, it is easy to overlook assets such as pension plans and retirement funds. A Qualified Domestic Relations Order can help couples to manage the division of long-term assets and payment plans. While the QDRO is most frequently filed with the divorce agreement, it can be prepared and filed before or after a divorce is completed. Since QDROs are subject to very specific and complex criteria pursuant to ERISA, individuals may wish to seek the advice of an attorney familiar with these matters who can help to ensure that the draft of a QDRO will be qualified by state authorities.