Divorce and Retirement Accounts - Qualified Domestic Relations Order (QDRO)
What happens to my retirement account if I get divorced?
Many divorce settlements, but not all, include the court awarding a portion of your retirement account to your ex-spouse. This is called a Domestic Relations Order (DRO). A domestic relations order would be prepared by one of the attorney's representing either the plaintiff or defendant and submitted to the judge for approval. After the judge approves the DRO, it's submitted to the retirement plan's Plan Administrator. This is usually a corporate officer at your company that approves retirement plan decisions.
They review the DRO for specific items that your retirement plan requires to make the DRO become a Qualified Domestic Relations Order (QDRO).
Once the DRO is accepted as a QDRO, it is submitted to your plan's service provider for processing. The provider would set up an account for the ex-spouse and move money from your retirement plan account to the ex-souse's account. Your ex-spouse could then withdrawal the money from the plan.
What is a QDRO?
A QDRO, or Qualified Domestic Relations Order, is a court order to divide a participant's retirement account during a divorce and award a portion to the ex-spouse. The QDRO grants the ex-spouse (known as an "alternate payee") the right to part of the retirement benefits their former spouse had accumulated in their company's retirement plan. A QDRO must include (1) each party’s name and last know mailing address, and (2) the amount or percent of the participant’s benefits to be paid to the alternate payee.
There are two steps to a QDRO:
- A Domestic Relations Order (DRO) must be ordered by a court, typically issued during the finalization of the divorce.
- The DRO is reviewed by the retirement plan administrator to ensure the order complies to the rules of the retirement plan. If the order does comply, the DRO becomes a QDRO.
What are my distribution options?
If you are the participant of the plan, you do not need to take any action. ERISA will review your account and divide the assets to both parties as the QDRO instructs.
If you are the alternate payee, you will be provided with an online account where you may choose how the assets are distributed. Your distribution options are:
- Lump Sum Payment – a direct cash payment made directly to you.
- Rollover – a transfer of your retirement account to a new 401(k) plan or IRA.
- Split payment – a portion of your balance paid as lump sum payment and the remaining amount rolled into a new 401(k) or IRA.
Are there any taxes deducted?
As the alternate payee, taxes are applicable depending on your distribution choice.
Lump Sum Payments: A required federal withholding of 20% is applied. State taxes may also apply. QDROS are exempt from the 10% early withdrawal penalty.
Rollover: No taxes is applied, unless pre-tax amounts are transferred to an after-tax account like a Roth IRA.
Split Payments: taxes are applied only to the amount withdrawn as a lump sum payment.
According to the IRS, a QDRO distribution that is paid to a child or dependent is taxed to the plan participant.
How do I request my distribution?
To request your distribution, complete and return this form.
Distribution forms may be returned to us by uploading your completed form at this link or by mail at PO Box 22968 Nashville, TN 37202.
When can I expect my distribution to arrive?
Once your distribution form has been received, the plan administrator must review and approve the distribution.
Once approved, your distribution check will be issued by Charles Schwab Bank. By default, the check will be mailed by USPS. It can take up to 10 days for the check to arrive. If you selected to roll funds into a new plan or IRA, it may take two to three additional business days for the check to be deposited to your new account