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Employee Benefit Services

How to Divide Retirement Assets upon Divorce

There are several overriding rules that govern qualified retirement plans, including that plan assets are for the exclusive benefit of plan participants and that a participant’s benefit cannot be assigned to another person. These rules conflict with the awarding of a portion of a participant’s retirement account to a spouse or other party in the case of divorce or other domestic separation. The solution is the Qualified Domestic Relation Order (QDRO).

The QDRO, which was created by the Retirement Equity Act of 1984, is a court-certified order that implements the provisions of a negotiated divorce agreement by identifying the assets to be paid to an Alternate Payee. An Alternate Payee is typically a spouse or domestic partner. QDROs can also be used to fulfill child support payments or serve as a bridge between a state court decree and federally protected retirement benefits.

In order for the assets to be paid to an Alternate Payee, the qualified retirement plan receives a Domestic Relations Order (DRO). For a DRO to become qualified, it must clearly specify:

  • the name and address of the participant and each Alternate Payee covered by the order, along with the relationship of the Alternate Payee to the participant;
  • the name of the qualified retirement plan and plan administrator to which the order applies;
  • the amount or percentage of the participant’s benefit to be paid to each Alternate Payee, and the manner in which the amount or percentage is to be determined; and
  • the number of payments or period to which the order applies.

When a qualified retirement plan receives a DRO, the Plan Administrator must follow written plan procedures to meet the requirements of Internal Revenue Code Section 414(p)(6). The Administrator must notify the participant and each Alternate Payee and provide written procedures for the determination of the DRO’s qualified status. During the 18-month allowable determination period, the Administrator must separately account for the Alternate Payee’s stipulated amounts. Once the determination is made, the QDRO is certified by the court and the amount is paid to the Alternate Payee. If the DRO is determined not to be qualified, the amount is re-credited to the participant as if the DRO never occurred. Failure to follow QDRO procedures is potentially both a breach of fiduciary duty and a plan disqualification issue.

A QDRO may not require a plan to provide any type or form of benefit not otherwise allowed by the plan or payments that contradict a prior QDRO. An Alternate Payee can generally be paid at the earliest date a participant would be eligible for a distribution by the plan document, either in-service or if the participant separated from service. A plan may be written to allow for immediate distribution to an Alternate Payee, regardless of other plan provisions.

If the Alternate Payee is the participant’s spouse or former spouse, the distribution may be rolled over to an IRA or a qualified retirement plan. If the distribution is not rolled over, the alternate payee is responsible for the resulting taxable income; however, the distribution is not subject to the early distribution penalty. If the Alternate Payee is not the spouse (e.g., a child), then the distribution cannot be rolled over, and the participant is responsible for the tax on the amount distributed.

While not all divorce settlements require a QDRO (the retirement plan account may be retained by the plan participant in exchange for other assets), they are commonly employed, as the retirement plan account is typically a significant portion of a couple’s community property. Plan sponsors must take care to properly follow the plan’s QDRO procedures to ensure proper execution of the court order.

For questions or more information, please contact Richard Green at or 844.4WINDES (844.494.6337).
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