What are Qualified Retirement Plan Benefits?

In a divorce, it is common that one spouse’s qualified retirement plan benefits are often used to pay property settlements. Qualified plan benefits paid to a nonspousal alternate payee do not receive special tax treatment and are taxable to the employee-participant.

 

A “qualified domestic relation order” (QDRO)

A “qualified domestic relation order” (QDRO) is a domestic relations order that creates or recognizes the existence of an alternate payee’s right to receive, or assigns to an alternate payee the right to receive, all or a portion of the benefits payable with respect to a participant under a retirement plan, and that includes certain information and meets certain other requirements.

 

What is a “Qualified domestic relation order” (QDRO)?

The important difference is that amounts paid to a spouse or former spouse under a qualified domestic relations order (QDRO) receive special treatment. The former spouse treats the distribution the same as the employee-participant. Such payments are taxable to the spouse or former spouse, not to the employee-participant.

A distribution made to the plan participant’s spouse or former spouse can be partially or wholly rolled over tax free to the spouse’s eligible retirement plan if it is done within 60 days of receipt and:

  1. it is distributed to the recipient under a QDRO, and
  2.  it would have met the definition of an eligible rollover distribution if it had been made to the employee (see Key Issue 5F).

 

What Is a QDRO?

A qualified domestic relations order is a judgment, decree, or order that recognizes the rights of an individual other than the retirement plan participant (employee) to a portion of the benefits payable under the retirement plan. The QDRO establishes the ex-spouse’s legal right to receive a designated percentage of qualified plan account balance or benefit payments. The QDRO requirements must be carefully followed to ensure taxpayers of the intended results.  The QDRO arrangement permits the ex-spouse to withdraw his/her share and roll the money over into his or her own IRA to the extent current withdrawals are permitted by the terms of the qualified retirement plan.

 

Qualified domestic relations order

It is very important for a divorce lawyer to consider the effects of a qualified domestic relations order  and the potential tax consequences of such actions. To receive tax-free treatment, the divorce decree (or separation agreement) must specifically require the transfer and that the transfer be made directly to an IRA in the name of the spouse or former spouse.

 

What information must a domestic relations order contain to qualify as a QDRO under ERISA?

QDROs must contain the following information:

  • The name and last known mailing address of the participant and each alternate payee
  • The name of each plan to which the order applies
  • The dollar amount or percentage (or the method of determining the amount or percentage) of the benefit to be paid to the alternate payee
  • The number of payments or time period to which the order applies

 

Are there other requirements that a domestic relations order must meet to be a QDRO?

There are certain provisions that a QDRO must not contain:

  • The order must not require a plan to provide an alternate payee or participant with any type or form of benefit, or any option, not otherwise provided under the plan
  • The order must not require a plan to provide for increased benefits (determined on the basis of actuarial value)
  • The order must not require a plan to pay benefits to an alternate payee that are required to be paid to another alternate payee under another order previously determined to be a QDRO
  • The order must not require a plan to pay benefits to an alternate payee in the form of a qualified joint and survivor annuity for the lives of the alternate payee and his or her subsequent spouse