Retirement Plans: Qualified Domestic Relations Orders
By Erin Slavin, JD, CISP, QKA
What is the difference between a domestic relations order (DRO) and a qualified domestic relations order (QDRO)?
A domestic relations order (DRO) is a judgment, decree, or order issued by a state court that relates to disposition of retirement plan assets as marital property, alimony or child support, typically as part of a divorce or legal separation.
To be considered a qualified domestic relations order (QDRO), the DRO has to fulfill certain requirements and be determined qualified by the retirement plan administrator. Once the order is qualified, it is considered an exemption to the anti-assignment and alienation provisions of ERISA and payable to the alternate payee to which the retirement plan assets have been assigned.
Can the alternate payee take a distribution immediately after the amount has been awarded?
When an alternate payee can take a distribution depends on the terms of the plan document. Unless the plan document allows for an additional triggering event for the alternate payee, the alternate payee would have the same distribution triggers as the participant.
The Ascensus® Basic Plan Document has an additional distribution trigger for the alternate payee to take a distribution pursuant to a QDRO. This does not create a distribution trigger for the participant.
How can the alternate payee take the awarded amount from the plan?
An alternate payee has the same rights as a participant to choose how to take a distribution. The QDRO cannot award a benefit to the alternate payee that is not available to the participant under the plan provisions, so the different ways an alternate payee can receive the money (i.e. lump sum, installments, and annuity) would depend on what is available to the participant under the terms of the plan. For example, an alternate payee cannot choose to take installment payments from the plan if the plan does not allow the participant to do so.
How will the award be taxed and reported?
If the spouse alternate payee chooses to take a distribution from the plan, the amount taken generally will be taxable to the spouse. This distribution will be reported on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., with either a code 2, Early distribution, exception applies, or code 7, Normal distribution, in Box 7 depending on the age of the alternate payee. Distributions to an alternate payee from a qualified retirement plan are an exception to the 10 percent early distribution additional tax. A QDRO distribution that is paid to a child or other dependent is taxed to the plan participant.