We’ve placed information about Qualified Domestic Relations Order in the withdrawal section of the site because, in essence, that’s exactly what it is – a withdrawal. Although it is an involuntary type of withdrawal.
What exactly is a QDRO?
A Qualified Domestic Relations Order-or QDRO (pronounced kwahdro) – is a court order that assigns all, or a portion, of retirement plan benefits to an alternate payee. The alternate payee is most commonly an ex-spouse, but can also be a spouse, a child, or any other dependent of the plan participant.
Since it usually occurs as a result of a divorce, we’ll use that as an example. As two ex-spouses go through the litigation and settlement in a divorce case a DRO (domestic relations order) is drafted which, among other things, divides assets between the ex-spouses.
A DRO becomes qualified when it takes into account the assets in a qualified plan. Hence the name Qualified Domestic Relations Order. Once the QDRO is finalized it is sent to the plan sponsor (the employer) to divide the assets.
How does it work?
While it depends entirely on the terms of the QDRO, the alternate payee will not only get a certain amount of money from the payor’s account, but will also receive the earnings as of a certain date. For example, let’s say the alternate payee will receive $100,000 with an effective date of the QDRO as January 1st, 2007.
This means that the alternate payee will receive $100,000 PLUS any earnings that money has made since January 1st, 2007. However, the same goes for losses, too. If the payor’s account sustained market losses during that time, the losses are included, so the alternate payee could receive less than the $100,000 the QDRO promised them.
What rights does an alternate payee have?
Generally speaking, the new alternate payee has similar rights to their new account as a true participant in the plan. If they choose to leave the money invested in the 401k plan, they can do so. If they choose to roll the money over or pay it out, they can do that, too.
As an alternate payee, however, they are now responsible for the taxes owed on any distributions they make from the plan.
But be careful! If it is determined that a Domestic Relations Order was not qualified prior to the splitting of assets, the tax liability falls on the payor, not the alternate payee! There are cases in which this has happened, and while the alternate payee was happy, the payor was left to pay taxes on a LOT of money. Don’t let this happen to you!
For much more detail check out the qualified domestic relations order FAQ’s on the DOL website.