A QDRO is a judgment, decree or court order that relates to child support, alimony or a divorce settlement under state domestic relations law. Under federal law, QDROs can provide benefits to a spouse, former spouse, child or other dependent of the retirement plan participant. The person receiving a benefit from a QDRO is called an alternate payee. Without a QDRO that is accepted by the retirement plan, the alternate payee will not be able to receive any part of the retirement benefits.
By law, QDROs must contain the name and address for the alternate payee, the exact name of the retirement plan that will be paying the benefits, the amount (either a dollar figure or percentage of benefits) that should be paid to the alternate payee, and the number of payments or time period covered by the QDRO. QDROs are not allowed to give the alternate payee any benefits that are not available to the participant in the plan. For example, if the participant has not yet reached the retirement age required to receive a benefit under the plan, the alternate payee will not be able to receive a benefit before the participant reaches retirement age.
To obtain a QDRO, first you will need a judgment, decree or court order stating that you are entitled to all or a portion of your former spouse's retirement benefits. Once you have the court mandate, you may contact the retirement plan for further instructions since many plans have model QDROs to use or specific rules that must be followed. In addition, there are companies devoted to drafting QDROs on your behalf or you may have your divorce attorney draft your QDRO for you. Once drafted, you may submit the QDRO to the retirement plan for approval. Once the QDRO meets the retirement plan’s standards and has been approved, you may then file the document with the court. Benefits will begin to be paid in accordance with the terms of the QDRO.
The alternate payee will treat the distributions received through the QDRO as if it were her own retirement benefits. This means that the retirement benefits are likely to be treated as income and must be reported on the alternate payee’s income taxes. There are, however, exceptions to this rule. If the alternate payee receives money through a QDRO from a Roth 401(k) plan, the benefits would not be taxable since they were originally contributed to the plan on an after-tax basis. Also, if the QDRO assigns a benefit to a dependent of the plan participant, the plan participant would be responsible for paying taxes on the benefit.