Sunday, May 13, 2012

What is a QDRO?

QDRO stands for “Qualified Domestic Relations Order.” The term is created by federal law and applies to retirement plans created under ERISA, the Employee Retirement Income Security Act. ERISA is the federal law that allows private employers and individuals to have retirement accounts which have tax advantages to encourage the creation of private retirement accounts. ERISA also protects retirement accounts from most creditors. As a result, a person can't be sued and lose their retirement accounts. The exceptions to this protection against creditors are child support and alimony. If the creditor is a spouse or someone entitled to child support, they can reach retirement accounts. Retirement accounts can be a source of funds to pay alimony or child support. In addition, retirement accounts can be divided pursuant to a property division in a divorce.

Retirement accounts are not intended to be liquidated before retirement age. As a result, it could be a problem to divide the asset in a divorce. Congress solved this problem by creating the concept of a QDRO. A QDRO is an order from a court where, pursuant to a divorce, the court orders a portion of a retirement account transferred to a spouse. This allows the transfer of money from one retirement account to the retirement account of a spouse without incurring tax penalties. A QDRO describes with particularity how the account shall be divided and allows for future contributions to the account that may not be divided pursuant to the divorce. Since retirement accounts have many different characteristics, the QDRO should be tailor made to the employer's account. The QDRO is typically drafted by an attorney and then submitted to the employer for approval. After the employer has approved the QDRO, a judge must approve the document. The QDRO will then be filed with the employer. The transfer will then occur and penalties for early withdrawal can be avoided.


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