401(k) Administration Basics: QDROs
When couples divorce, the resulting settlement often calls for the division of retirement plan assets. But how are these assets separated from a retirement plan participant’s account? A qualified domestic relations order (QDRO) is a judgment, decree, or order for a retirement plan to pay child support, alimony, or marital property rights to a spouse, former spouse, child, or other dependent of a child (an alternate payee). Let’s look at some key principles that every plan administrator should be aware of when handling a QDRO.
- Retirement plans are required to establish written procedures for administrating assets under QDROs. Be sure to locate and follow these procedures!
- Upon receipt of a QDRO, the plan administrator should notify the plan participant and the alternate payee(s) named in the order.
- The QDRO must specify the participant; the alternate payee; the last know mailing address of the participant and the alternate payee; the amount, percentage, or formula of the plan participant’s benefits to be paid to the alternate payee (or payees); and the number of payments or time period to which the order applies.
- Former spouses who receive assets as the result of a QDRO distribution are responsible for paying the associated taxes. Taxes can be deferred by rolling the assets into an IRA or another qualified plan. Please note: QDRO distributions are not subject to the 10-percent early-withdrawal penalty.
- A QDRO distribution that is paid to a child or other dependent is taxed to the participant.
Above all, it is imperative to adhere to the proper procedures when administering a QDRO. Failure to do so may result in significant operational failures. Plan administrators should lean on the expertise of their retirement plan service provider, TPA, or retirement plan advisor to guide them through the QDRO process.