If you are going through a divorce and have a pension plan, you may need to know how a QDRO affects your pension. A QDRO, or a qualified domestic relations order, is a court order that assigns a portion of your pension benefits to another person, such as your spouse, former spouse, child, or other dependent. A QDRO can be part of a divorce settlement or a separate legal order issued by the court after the divorce.
Why do you need a QDRO for your pension? Because pension plans are governed by federal laws that protect your benefits from creditors and prevent you from assigning them to anyone else without your consent. However, these laws also allow for an exception in the case of domestic relations orders, such as divorce decrees, that meet certain requirements. These requirements are:
- The order must clearly identify the plan, the participant, and the alternate payee (the person who receives the benefits).
- The order must specify the amount or percentage of benefits to be paid to the alternate payee, or the method of calculating it.
- The order must not require the plan to pay more benefits than the participant is entitled to, or to pay benefits in a form that is not available under the plan.
- The order must not conflict with any other QDRO or court order that affects the same plan.
Technically speaking, if an order meets these requirements, it is considered a QDRO and the plan administrator must comply with it. The plan administrator is responsible for reviewing the order and determining if it is a QDRO. The plan administrator must also notify the participant and the alternate payee of the status of the order and their rights and obligations under it.
Practically speaking, the order also has to include sufficient language and instructions to cover a whole host of contingencies, such as the death of a party or a dispute between the parties and plan overpayment amounts, before the plan administrator will accept the order. Our QDRO language has passed the review of hundreds of retirement plans already and supports over 500,000 retirement plans. Even though most of this language is standard, we still recommend that you send a copy of your rough draft to the plan for review (called “pre-approval”) and feedback before you sign it or submit it to the court for entry so that you can be sure it will be accepted after the judge signs.
Once the court enters the order, and you send an official copy to the plan, how will the QDRO affect your pension benefits? Depending on the terms of the QDRO, it may reduce or eliminate your benefits under the plan. For example, if the QDRO awards 50% of your benefits to your former spouse, you will only receive 50% of what you would have otherwise received. If the QDRO awards all of your benefits to your former spouse, you will receive nothing from the plan.
However, a QDRO does not affect your vesting status or your eligibility for benefits under the plan. You still have the same rights and options as before, except that some or all of your benefits may be payable to someone else. For example, you can still retire at the normal retirement age or earlier, if allowed by the plan. You can also choose among different forms of payment, such as a lump sum or an annuity, unless the QDRO specifies otherwise.
The tax treatment of your pension benefits may also change because of a QDRO. Generally, pension benefits are taxable to you when you receive them. However, if a QDRO assigns some or all of your benefits to an alternate payee who is your spouse or former spouse, he or she will be taxed on those benefits instead of you. If the alternate payee is not your spouse or former spouse, such as your child or other dependent, you will still be taxed on those benefits.
In some cases, you or the alternate payee may be able to roll over some or all of the QDRO distribution into an individual retirement account (IRA) or another qualified plan and defer taxes until withdrawal. However, this option may not be available for certain types of plans or payments. You should consult with a tax professional before making any rollover decisions.
Finally, the QDRO may also affect survivor benefits – the amounts paid to your surviving spouse in the event of the employee’s death. While many people swear off marriage after a divorce, most reconsider and remarry later on – and wish to protect their subsequent spouse. If a QDRO has assigned all or part of the survivor benefits, this may not be possible.
A QDRO can have significant implications for your pension benefits and your financial future. Therefore, it is important to understand how a QDRO works and how it affects your retirement plan. When drafting a QDRO, whether through an attorney or through our software, it is important to review the document thoroughly and make careful choices before submitting it to the plan for review, signing it, or filing it with the court.