By Ian Berger, JD
1. What is a QDRO?
A QDRO is a “qualified domestic relations order.” In plain English, it is a state court order obtained by divorcing parties that requires an ERISA plan to pay a portion of a participant’s benefit to the non-participant spouse. QDROs are an exception to the rule that prohibits an ERISA plan from paying benefits to anyone other than a plan participant or beneficiary.
2. Can a QDRO be used for IRAs?
No. QDROs are generally only for ERISA plans, and IRAs are not covered by ERISA. In a divorce situation, IRAs can be split via a divorce decree or property settlement agreement. Funds are transferred through a direct trustee-to-trustee transfer to an IRA in the name of the non-owner spouse.
3. What portion of a participant’s benefit is paid to the other spouse in a QDRO?
The divorcing parties negotiate the amount of the benefit payable to the non-participant spouse. The non-participant spouse can receive all or any part of the participant’s benefit.
For a defined contribution plan, a typical QDRO will award the non-participant spouse 50% of the participant’s account balance as of the date of divorce. A typical QDRO for a defined benefit plan will award the non-participant spouse 50% of the “marital portion” of the participant’s benefit. The marital portion is normally defined as the number of years the participant was in the plan while married, divided by the total number of years the participant was in the plan.
Example: John and his ex-wife, Christine, agree to a QDRO which pays Christine a portion of his defined benefit plan benefit using the above formula. Assume John and Christine were married in 1994 and divorced in 2014. Also assume John began participating in the plan in 1999 and retires in 2019 with a benefit of $6,000/month. Under the QDRO, Christine would receive [50% x (15 years/20 years x $6,000)], or $2,250/month. John would retain ($6,000 – $2,250), or $3,750/month. This result makes sense because John and Christine were married for only 15 of the 20 years that John was in the plan.
4. How are QDRO payments taxed?
QDRO payments are taxable to the non-participant spouse – not to the participant. But the non-participant spouse can roll over QDRO payments to an IRA– just as if she were a plan participant. And, even if the non-participant spouse is under age 59 ½, QDRO distributions are exempt from the 10% early distribution penalty.
5. Where can I get more information?
QDROs – especially defined benefit QDROs – can be very complicated. If you a party to a QDRO, make sure your divorce lawyer is well-versed in the QDRO rules. If you are an advisor, make sure your client gets adequate legal help (and, if necessary, actuarial help).
The Department of Labor has published the following helpful article about QDROs: