What Is a QDRO and When Do You Need One?

A QDRO (qualified domestic relations order) is a court order that tells an employer retirement plan, such as a 401(k) or a pension, to pay part of one spouse's benefit to the other spouse, a former spouse, a child or another dependent. You need one whenever a divorce settlement divides a retirement plan covered by ERISA, the federal law that governs most private-employer plans. Without a QDRO the plan generally can't pay anyone but the employee, no matter what the divorce judgment says. The order has to meet federal requirements and be approved by the plan administrator, so it's best drafted alongside the settlement rather than after the case closes. This is general information, not legal advice.

How a QDRO works

1. The settlement or judgment says how a retirement account will be divided (for example, a percentage of the balance as of a set date).
2. A QDRO is drafted that translates that agreement into terms the specific plan can carry out. Many plans publish model orders and QDRO procedures.
3. The court signs the order. A domestic relations order is issued under state family law.
4. The plan administrator reviews it and decides whether it is "qualified" under federal law. Plans must have written QDRO procedures and notify both parties of the decision (ERISA § 206(d)(3)(G)).
5. The plan pays or divides the benefit for the "alternate payee," the person receiving the share, according to the approved order.

While the administrator decides, amounts that would be payable to the alternate payee are separately accounted for, for up to 18 months (ERISA § 206(d)(3)(H)).

What a QDRO must include

Under ERISA § 206(d)(3)(C) and Internal Revenue Code § 414(p), the order must clearly state:

• the name and last known mailing address of the plan participant and each alternate payee
• the amount or percentage of the benefit to be paid to the alternate payee, or how it's to be calculated
• the number of payments or the period the order covers
• each plan the order applies to

A QDRO also can't require the plan to pay a type or form of benefit the plan doesn't otherwise offer, or to pay more in total than the plan would have (ERISA § 206(d)(3)(D)).

Which accounts need a QDRO, and which don't

Defined contribution vs. pension: why the drafting differs

• 401(k)-type accounts have a balance. The order usually awards a dollar amount or a percentage as of a specific date and should say whether gains and losses after that date are included.
• Pensions promise a future monthly benefit. The order has to address when the alternate payee can start payments, how the marital share is calculated, and whether the alternate payee keeps survivor benefits if the employee dies. A QDRO can treat a former spouse as the surviving spouse for survivor-annuity purposes (ERISA § 206(d)(3)(F)).

Taxes and the early-withdrawal penalty

• No 10% penalty on QDRO payments to an alternate payee from a qualified employer plan, even if they're under 59½ (IRC § 72(t)(2)(C)).
• Income tax still applies. A spouse or former spouse who receives a QDRO distribution generally pays the income tax on it, and can usually roll it into their own IRA or plan to defer tax.
• IRAs are different. The § 72(t) QDRO exception doesn't cover IRAs, so an ex-spouse who withdraws from an IRA received in a divorce before 59½ may owe the penalty unless another exception applies.

Common QDRO mistakes in high-asset divorces

• Waiting until after the divorce. Delays create risk: the employee could retire, take a loan, change the form of benefit or die before the order is approved.
• Settlement language the plan can't follow. Vague terms ("half the retirement") lead to rejected orders and new court filings.
• Missing a plan. Executives often have several: a 401(k), a pension, a deferred compensation plan and stock awards. Nonqualified deferred compensation and equity awards generally aren't divided by QDRO and need their own settlement terms.
• Ignoring survivor rights on a pension, which can leave the former spouse with nothing if the employee dies first.
• Not handling outstanding plan loans, which reduce the balance available to divide.

When to bring in specialists

Family law attorneys handle the settlement; many work with QDRO drafting specialists or actuaries for pensions and complex plans. Ask your attorney who will draft the order, whether it will be pre-approved by the plan before the judge signs it, and who will follow up until the plan confirms it is qualified.

Related Haute Lawyer answers

• What is equitable distribution?
• How much does a high-net-worth divorce cost?
• How is a business valued in divorce?
• What happens if a spouse hides assets in a divorce?
• How is alimony calculated?

Find a family law attorney

• Find a Family Law Attorney
• Kevin Rubin — Family Law, Rubin Family Law LLC, Atlanta, GA
• Eric J. Broder — Family Law, Broder & Orland LLC, Westport, CT

This article is general information, not legal advice, and doesn't create an attorney-client relationship. Talk to a licensed attorney in your state about your situation.