What Is a Qualified Domestic Relations Order (QDRO)?
A qualified domestic relations order (QDRO) is a legal document, typically found in a divorce agreement, that recognizes that a spouse, former spouse, child, or other dependent is entitled to receive a predefined portion of the other spouse's individual retirement plan assets.
- A qualified domestic relations order (QDRO) means or is defined as a legal document that may be issued in family court.
- This type of document is often used in divorce agreements.
- A QDRO recognizes that a spouse, former spouse, child, or other dependent is entitled to receive some of the other spouse's retirement plan assets.
- A court order cannot force a retirement plan to disburse any benefit not provided through the plan nor require increased benefits from the retirement plan.
- In most cases, taxes must be paid on money from a qualified domestic relations order.
Understanding a Qualified Domestic Relations Order (QDRO)
According to the Internal Revenue Service (IRS), a spouse or former spouse must report the QDRO benefits received as "if he or she were a plan participant." However, a QDRO distribution that is paid to a dependent, like a child, is taxed to the plan's participant. This is different if the distribution is going to a spouse or former spouse. The QDRO generally grants the spouse 50% of the value that the account accumulated during the marriage. Once the distribution is made, the former spouse becomes responsible for any taxes due.
If there is no QDRO and the account holder distributes retirement plan assets to the former spouse, the account holder would be responsible for the taxes on the assets transferred.
Retirement benefits from more than one retirement benefit plan can be subject to a QDRO as long as it clearly states the benefits that are assigned to the former spouse.
Disadvantages of a Qualified Domestic Relations Order (QDRO)
Rules imposed by the U.S. Department of Labor's Employee Benefits Security Administration restrict specific provisions from being included in a QDRO. The court order cannot force a retirement plan to disburse any benefit or option that is not provided through the plan. In addition, the QDRO cannot require increased benefits from the retirement plan.
Benefits cannot be required from a plan for an alternate payee when those benefits are already required to be covered by another payee under the decree of another QDRO. A benefits plan cannot be required to cover benefits that are a qualified joint and survivor annuity for the ex-spouse and any later spouses.
In the case of a divorce or custody issue, a family court judge may issue a QDRO for a dependent.
In some cases, a QDRO might be put in place for a relation other than a former spouse, but dependents might also qualify to receive the ordered benefits. In such instances, the alternate payee is a minor or is determined to be legally incompetent. The order can require the benefit plan to make payment to an individual with legal responsibility for that payee. This can include a guardian as well as a trustee who serves as the agent of the individual.
The plan administrator who oversees the retirement benefits subject to the order will determine if a QDRO is a qualified domestic relations order. In these circumstances, plan administrators are then responsible for ensuring their duties are fulfilled on behalf of plan participants and beneficiaries.