Qualified Domestic Relations Orders(QDROs)

In many divorces cases, one of the most significant assets in a couple’s marital estate may
be retirement benefits earned by one or both of the parties through their employment.

There are generally two types of retirement benefits: defined contribution plans and
defined benefit plans.

Defined contribution plans are retirement savings accounts, such as a 401(k).

Defined benefit plans are pensions through which participants in the plan will receive a
stream of monthly annuity payments when they reach retirement age.

Because marital income from any source is considered marital property, your
contributions to either type of plan (whether defined contribution or defined benefit) are
usually marital property subject to equitable division by the court in a divorce.

Determining what portion of retirement benefits is separate or marital is a complicated
issue that requires attorney analysis.

The most important thing to remember is that whatever portion of retirement benefits
may be divisible in a divorce must be transferred to the former spouse by means of a
special court order that is issued after the divorce is over. This special court order is
called a Qualified Domestic Relations Order (or “QDRO” for short).

The QDRO must be signed by both parties (and their attorneys) and then signed by the
judge who granted the divorce. The signed order is then forwarded to retirement plan
administrator for its review and final approval.

Once the plan administrator has determined that the court order is “qualified” (hence the
name Qualified Domestic Relations Order), the plan will segregate whatever portion of
benefits is owed to the other spouse under the divorce decree. The other spouse who
receives these benefits is known as the “Alternate Payee”.

QDRO’s can assign a fixed dollar amount or a percentage of benefits to an Alternate
Payee. For example, a QDRO can specify that a plan participant’s former spouse will
receive $50,000 from the participant’s 401(k). Or a QDRO can specify that the Alternate
Payee will simply receive 50% of whatever the plan participant’s account balance was on
a certain date (usually the date of the dissolution decree).

Using a QDRO is absolutely essential to dividing retirement benefits in a divorce. If the
QDRO is not used, the transfer of retirement benefits from one spouse to the other is
treated as a taxable event and is also subject to early withdrawal penalties.