Understanding Qualified Domestic Relation Orders (QDROs)
By Jeff Aga, CPC, TPGC, QKA, QPA, CISP, CHSP
What is a Qualified Domestic Relation Orders (QDRO)?
A QDRO begins as a state domestic relations order (DRO), judgment, or decree, which is generally issued in connection with the payment of child support, alimony, or the division of marital property from qualified retirement plan, 403(b) plan, or governmental 457(b) plan assets. The DRO directs a plan administrator to divide the participant’s benefit among the participant and the participant’s former (or legally separated) spouse or dependents. The affected spouse, former spouse, child, and other dependents, are referred to as “alternate payees.” A QDRO allows payment of all or a portion of a participant’s benefit to an alternate payee.
Who is responsible for determining the status of a DRO?
Under most plans, the plan administrator must determine whether a DRO constitutes a QDRO under the relevant plan provisions. This determination generally will require the assistance of an attorney.
What information needs to be contained in a QDRO?
Generally, a QDRO should specify
the alternate payee’s right to a benefit under the plan (including names and addresses of the plans and parties involved);
the amount or percentage of benefits assigned under the order;
the number of payments to be made or the period of time over which the order is enforceable (i.e., when payments should commence and terminate); and
the plans to which the order relates.
The court order may also indicate the form of payout to be made. The order may not, however, require a form of payout not otherwise permitted under the plan.
What are the tax consequences of distributions to alternate payees?
Any distribution of benefits made to an alternate payee who is a spouse or former spouse is taxable to the alternate payee, rather than the participant. QDRO payments made to an ex-spouse generally qualify as eligible rollover distributions and may be rolled over to an IRA or to another qualified plan. As with payments to participants, eligible rollover distributions that are not directly rolled over are subject to mandatory 20 percent withholding. Other QDRO payments (e.g., payments made to a child) are taxable to the participant. QDRO payments are not subject to the 10 percent early distribution penalty tax.
What rights does an alternate payee have under a QDRO?
The rights of an alternate payee will vary from plan to plan. ERISA Sec. 206(d)(3) provides that an alternate payee is considered a beneficiary under the plan for purposes of ERISA. The beneficiary’s specific rights will be spelled out in the plan document. Some plans grant alternate payees the rights of a participant (e.g., self-direction, naming a beneficiary). The Department of Labor states that until such time as an alternate payee begins receiving benefits, the alternate payee must receive, upon written request, copies of the latest summary plan description, the latest annual report, any final annual report, trust agreement, contract, or other instrument under which the plan is operated. Once payments begin, according to the DOL, the alternate payee must automatically receive the summary plan description, summaries of material plan changes and the plan’s summary annual reports.
