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Qualified Domestic Relations Order (QDRO) Definition
A Qualified Domestic Relations Order is a court order directed at holder of an individual’s retirement funds. In most states, spouses acquire a legal or equitable interest in all assets that come into the estate (except for assets received as a gift or inheritance) during the marriage. This includes the retirement benefits (either defined benefit or defined contribution plans) accrued by either spouse.
When spouses separate, the court often distributes ownership of the total assets to each spouse (i.e., the court separates and divvies up the assets). Because the retirement assets are held by a third-party retirement fund, the court will issue a QDRO to the fund managers regarding how to distribute the assets when they are withdrawn.
A Little More on What is a Qualified Domestic Relations Trust
As stated above, the QDRO is used to order a retirement fund to distribute assets from a retirement account in a specific manner. For example, the QDRO could order the fund to distribute 50% of the retirement benefits to one spouse and 50% of the assets to another. This order allows the retirement fund to legally undertake this action. Further, it allocates any tax liability for the distribution to the party receiving the distribution.
Without a QDRO, a spouse may give 50% of her retirement benefits (upon receipt) to the other spouse. In this case, the retiree spouse will be taxed the full value of the benefits received. Additionally, she may be subject to gift taxes on the benefits transferred to the former spouse. A QDRO will fix this unfortunate tax consequence.
There are limitations on the extent to which a state court can order a retirement fund to take action pursuant to a QDRO, including:
- The order can only control benefits included in the plan and cannot create additional benefits.
- The QDRO does not have priority over previous QDROs that allocate the retirement benefits.
- The QDRO cannot control qualified joint benefits or survivor annuities for the ex-spouse and their subsequent spouses.
In some situations, a court may issue a QDRO for the benefit of a non-spouse (such as dependent child or family member).
References for Qualified Domestic Relations Orders
Academic Research on Qualified Domestic Relations Order (QDRO)
Qualified Domestic Relations Order, QUALIFIED, S., & JUDGE, V. A. This paper defines a qualified domestic relations order as a form of a court order that is, mostly found in divorce agreements that stipulate an ex-spouse has a right to claim a certain portion of the retirement plan of the individual. It also explains how this order allocates half of all the wealth accumulated during a marriage to the ex-spouse.
Qualified domestic relations order-Tax implications, Unger, J. (1993). The CPA Journal, 63(2), 62. This article explains the fact that when an ex-spouse is allocated plan benefits as a result of a QDRO, he/she is obligated to pay associated income tax. These allocated benefits are charged just like any other usual plan distribution. However, a cash-out distribution pursuant to a QDRO is not subjected to the 10 percent early withdrawal penalty as the other plans.
Taxing Retirement Distributions at Divorce in the Absence of a Qualified Domestic Relations Order, Zimmerman, J. C. (1995). Taxes, 73, 326. This paper first explains how the retirement benefits are distributed to the ex-spouse since these benefits are among the most contentious items in a divorce. The paper then focuses on how the retirement benefits are taxed in case a qualified domestic relations order is not available.
QUALIFIED DOMESTIC RELATIONS ORDER-MARITAL PROPERTY RIGHTS-ALTERNATE PAYEE-DEFENSE OF MARRIAGE ACT-” QUASI-MARITAL” …, Ehrens, D. R. M. (2010). Benefits Quarterly, 26(1), 51. This paper illustrates how the pension benefits accrue to a marital property that is subject to a qualified domestic relations order provided the order involves marital property rights that are within the bounds of the applicable state law. For QDRO to be a valid order, it should relate to marital property rights and uphold the right of another payee to receive either all or a part of the benefits expected by a plan participant.
Fundamentals of Qualified Domestic Relations Orders, Voit, T. C., & Parris, J. L. (2000). SC Law., 12, 24. A QDRO is an order that requires a pension plan to allocate a part of a participant’s accumulated plan benefits to a spouse, former spouse or a dependent to a divorce. It also explains that some plans are exempted from accepting QDROs. Congress and the individual states regard pensions as marital assets. This article lays down some fundamental aspects of the QDRO.
Qualified Domestic Relations Orders: A Statutory Analysis, Massler, H. A. (1989). Seton Hall L. Rev., 19, 224. This study performs an analysis of the statutory requirements of the qualified domestic relations order. It explains how QDRO recognizes the ownership interest of a spouse in the pension plan of a plan participant and as a result allocates a section of this pension plan to an alternate employee. It states that these QDROs are only applicable to pension plans that are subject to the Employee Retirement Income Security Act.
A Primer on the History and Proper Drafting of Qualified Domestic–Relations Orders, Cain, T. (2011). TM Cooley L. Rev., 28, 417. This study describes the history of the development of QDROs, explain what they involve and also give insights to some of the possible traps to avoid when drafting them. They are used to make sure that each member receives their marital share of the other’s retirement plan. The study explains that drafting of QDROs is complicated and takes a lot of time and effort and it details the process involved.
The Many Applications of Qualified Domestic Relations Orders, Oliveira, C. M. (1998). Family Law Quarterly, 32(3), 641-647. This research states that although the QDRO is designed as an exclusive mechanism of transferring pension benefits in divorce, it can be used for other purposes. As suggested by several courts, the QDRO can be used to assign welfare benefits to former spouses, allocate welfare benefits to children as well as waiving the possible rights of a party to a pension.
Beneficiary Beware: New Directions from Matassarin v. Lynch for Those with Qualified Domestic Relations Orders, Escobedo, G. P. (1999). Mary’s LJ, 31, 847. This paper reviews the case of Matassarin v. Lynch where the plaintiff appealed to the district court to dismiss her ERISA and securities claims. It uses this case to explain the new direction and requirements that individuals with qualified domestic relations orders should be aware of.
New Domestic Relations Orders for Public Employees, Roudebush, M. B. (1996). Colo. Law., 25, 57. This article presents the most recent domestic relations order for public employees that is designed to award a spouse a portion of the benefits of an employee’s pension plan. Before this order is fulfilled, it is first reviewed by the employer, and if he/she is satisfied, the benefits are divided between the parties.