Decisions Affecting Divorce - Splitting of Retirement Benefits
Submitted November, 2000
- What is a QDRO?
- Technical Requirements for QDRO's
- Tax Results When a QDRO is Properly Executed
- Tax Results Without a QDRO --- The Hawkins Case
- QDRO for IRA Funds?
- Proper Planning Avoids Disasters
QDRO disaster or blessing? The answer is whichever you want it to be. A recent 10th Circuit Court reversal of the 1994 Hawkins Tax Court decision, while being favorable to the taxpayer, emphasizes the importance of a properly drafted Qualified Domestic Relations Order (QDRO) to divide retirement plan assets in a divorce. The requirements of the Internal Revenue Code, while necessary, are not difficult to meet and can save your clients tax dollars or future legal fees.
A QDRO is a legal document or a provision included in another legal document such as a divorce-related property settlement or divorce decree. The QDRO establishes the right of a former spouse (also known as the alternate payee) to receive all or part of the other former spouse's qualified retirement plan benefits and pay the income taxes on those benefits. In other words, "he who gets, pays."
A QDRO is required to meet specific requirements set forth in Internal Revenue Code Section 414(d). Until the Hawkins decision the Internal Revenue Service had been successful in claiming that a failure to follow the statutory requirements to the letter resulted in the participant former spouse being taxed on a constructive distribution from the plan, which is than deemed given to the alternate payee. In other words, the alternate payee gets the cash, while the former spouse gets the tax liability.
Per Internal Revenue Code Section 414(p), a QDRO must meet all of the following requirements.
It must provide for child support, alimony payments or marital property rights for a spouse, former spouse, child or other dependent of a qualified plan participant and it must be made pursuant to a state domestic relations law including a community property law.
It must create or recognize the existence of the right of the alternate payee to receive all or a portion of a participant's benefits under a qualified retirement plan.
- It must specify the following:
- The name and last known mailing address of the participant and each alternate payee covered by the order;
- The amount or percentage of the participant's benefits to be paid by the plan to each to each alternative payee (or the manner in which the amount or percentage is to be determined);
- The number of payments or periods to which the order relates;
- And each qualified retirement plan to which the order applies.
- To be a QDRO, an order must not:
- Require the plan to pay increased benefits;
- Require the plan to pay benefits to a "new" alternate payee when a previously named alternate payee is already entitled to those benefits; or
- Require the plan to provide a type or form of benefit or any option that is not otherwise provided for by the plan. However Internal Revenue Code Section 414(p)(4) does provide an exception that permits a QDRO to require the payment of "early retirement benefits" to a alternate payee even when the plan participant is not entitled to such benefits.