Qualified Domestic Relations Order
A Qualified Domestic Relations Order (QDRO) is an order allotted by a state court under the authority granted by Congress through the Employee Retirement Income Security Act. Part or the entire pension benefits billed to a participant under an employer's qualified plan are used for specific purposes. In other words, it's a way for an ex-spouse to get some of their former partner's pension.
The QDRO may pay for all or a portion of the pension benefits to one or more alternate payees, typically the participant's former spouse, spouse, child, or other dependents. The order must specify the fraction of the participant's profits to be paid to every alternative beneficiary and must otherwise meet federal law requirements.
Benefits of QDRO
There are a few key benefits to having a QDRO in place during and after your divorce. It can help ensure that both parties receive their fair share of marital assets, for starters. This includes anything from pensions and 401ks to stocks and real estate holdings.
In addition, a QDRO may also provide some tax relief for those who qualify post-divorce. For example, if you were awarded 50% of your spouse's 401k plan as part of the settlement, you would then be able to take withdrawals from that account without being taxed on them – since they would now be considered "yours." Furthermore, unlike other methods of splitting retirement funds, having a QDRO in place can help to ensure that you and your ex-spouse will both receive the same amount of money in retirement.
A QDRO does not affect the taxability of benefits payable to a participant because of his separate (nontaxable) contributions. For example, if a married couple contributes $20,000 to their pension plan and the husband's benefits are paid to the wife under a QDRO, the $20,000 is not taxable to either the husband or wife.
Disadvantages of QDRO
The disadvantages are much more prevalent in these cases. For instance, when one spouse is ordered to pay the other through a QDRO, it can impact how much they receive in retirement. In some cases, it might be more advantageous to delay taking distributions from the plan until age 70 ½ when required minimum distributions are no longer mandatory.
In addition, many employers will not allow employees to have more than one relief to the spouse of the participant. If you are awarded a QDRO, then you might be able to receive some benefits from your spouse's pension even if you are not listed as a beneficiary of their plan.
To learn more about QDRO, contact our attorneys.