Five QDRO Q&As
Although the U.S. divorce rate is in a steady decline, it’s still one of the highest in the world. And with divorces often come QDROs – “qualified domestic relations orders.” A QDRO is a state court order obtained by divorcing couples that requires a company plan to pay a portion of the benefit of the spouse participating in the plan to the other spouse.
Here are answers to five common questions about QDROs:
1. Are QDROs necessary for IRAs?
No. QDROs are only required when divorcing couples split funds in an ERISA plan, and IRAs are not covered by ERISA. IRAs can be split via a divorce decree or property settlement agreement.
2. How much of a participant’s benefit is paid to the other spouse through a QDRO?
There is no set amount. Instead, the divorcing couple negotiates how much the non-participant spouse will receive. For a 401(k) plan, a typical QDRO will award the non-participant spouse 50% of the participant’s account balance as of the date of divorce. QDROs for pension plans are more complicated. A typical QDRO will award the other spouse 50% of the “marital portion” of the participant’s benefit. The marital portion is normally the number of years the participant was in the plan while married, divided by the total number of years the participant was in the plan (married or not).
3. Who pays taxes on QDRO payments?
The non-participant spouse pays taxes on QDRO payments. But the non-participant spouse can roll over certain QDRO payments to an IRA– just as if she were a plan participant. And, even if the non-participant spouse is under age 59 ½, QDRO distributions are not subject to the 10% early distribution penalty.
4. What is an “in-marriage QDRO,” and do they work?
For several years, some attorneys and advisors have been pitching “in-marriage QDROs” that allow for the tax-free transfer of assets between a couple’s retirement plans while the couple is still married. However, be careful about this strategy because we’re not sure that it’s legal. The Department of Labor (which has jurisdiction over QDROs) has never endorsed in-marriage QDROs and, in fact, has suggested that they don’t work. See DOL Advisory Opinion 90-46A.
5. Where can I get more information?
QDROs – especially pension plan QDROs – can be very complicated. If you are in the process of divorcing, make sure your lawyer understands the QDRO rules. If you are an advisor, make sure your client gets adequate legal (and, if necessary, actuarial) help. The Department of Labor has published the following helpful guidebook: QDROs The Division of Retirement Benefits Through Qualified Domestic Relations Orders 2020 (dol.gov).
By Ian Berger, JD
IRA Analyst
Ed Slott and Company, LLC
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Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.