Contributing Author: Kristine Custodio Suero, Advanced Certified Paralegal
Dividing retirement benefits during a divorce can be complicated. A key tool in this process is a Qualified Domestic Relations Order (QDRO), a legal order that ensures retirement plan benefits are properly allocated between a plan participant and an alternate payee (typically a former spouse or dependent). Understanding how QDROs work can help avoid costly delays and protect everyone's interests.
This guide provides key information from the U.S. Department of Labor (DOL), the Internal Revenue Service (IRS), and the Government Accountability Office (GAO) to help clients, family law attorneys, and retirement plan administrators navigate QDROs with greater clarity.
What Is a QDRO?
A QDRO is a court order used in divorce or legal separation that allows a retirement plan to pay a portion of a participant's benefit to someone else—called an “alternate payee.”
To be valid under federal law (specifically ERISA and the Internal Revenue Code), a QDRO must:
- Be issued under state domestic relations law (e.g., divorce, child support, or alimony).
- Include the names and addresses of both the plan participant and alternate payee.
- Clearly state the amount or percentage to be paid.
- Specify which plan the order applies to.
- Not require the plan to provide benefits not otherwise offered.
Tip: Each retirement plan may have its own QDRO procedures. Using a plan-approved model can make approval faster and easier.
Tax Treatment of QDRO Distributions
The tax implications of a QDRO vary depending on who receives the distribution:
- Former spouse or spouse: These payments are taxed as if the recipient were the plan participant. The former spouse can often roll the amount into an IRA.
- Child or dependent: These payments are taxed to the participant, not the dependent.
- No early withdrawal penalty: QDRO distributions made to a spouse or former spouse are not subject to the 10% early distribution penalty—even if they're under age 59½.
Common Challenges
According to the GAO's 2020 report on retirement security, many people never get a QDRO—even when it's the only way to divide retirement benefits fairly after divorce.
Key issues include:
- Lack of awareness: Many people, including legal professionals, don't know a QDRO is needed.
- Complexity: The process can be confusing, especially without help from someone familiar with retirement plans.
- Cost barriers: Drafting and reviewing QDROs can be expensive, and not all plans disclose their fees up front.
- Inconsistent procedures: Each plan may handle QDROs differently, and there's no universal format.
Best Practices for Clients, Family Law Attorneys & Plan Administrators
For Clients:
- Ask your attorney early if a QDRO is needed.
- Make sure the QDRO is submitted and approved before the divorce is finalized if possible.
- Keep records of all documents related to your retirement plan division including account statements.
For Family Law Attorneys:
- Familiarize yourself with QDRO basics and refer to a QDRO specialist when needed.
- Use plan-specific model QDROs to avoid rejection and delays.
- Educate clients on the importance of completing the QDRO process, not just referencing it in a divorce decree.
For Plan Administrators:
- Provide clear QDRO procedures to participants and alternate payees.
- Respond to QDRO submissions promptly and communicate any missing information.
- Segregate the applicable benefits while the order is under review, as required by law.
Resources
Bottom Line:
QDROs are essential for ensuring that retirement benefits are divided fairly in divorce, but they require careful planning. Whether you're a divorcing individual, a family law professional, or a plan administrator, getting ahead of the QDRO process can protect legal rights, reduce stress and save time and money.
If you need assistance with a QDRO, contact Schechter Benefits Law Group today to ensure a smooth and legally compliant process. Schechter Benefits Law Group are trusted advisors in ERISA, QDROs and QDRO Litigation.
*Nothing stated herein is to be construed as legal or tax advice and shall not form any attorney-client relationship. Each individual situation is unique. Please contact us and speak with one of our attorneys regarding your individual situation.
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