Understanding the basics of a qualified domestic relations order

Nevada residents may not be aware of how an issued qualified domestic relations order (QDRO) can impact a retirement plan during a divorce procedure. Your former spouse, a dependent or child may be entitled by law to a portion of your 401(k) assets. This court judgment, order or decree may name someone other than you as a benefactor of your account to settle alimony payments, child support or property rights payments.

Two legal requirements must be met in order for a QDRO to be valid: It must be properly verified and created. Asking your company’s plan administrator for a model QDRO form with your specific plan early on during a divorce proceeding can help save time and money. If your plan is subject to a QDRO, it is required that you provide your plan administrator with either a copy of the court-certified document or an original. Then the administrator will formally proceed to establish the QDRO legality and put it into effect.

The funds that are removed from the 401(k) account in a processed QDRO are not subject to the early withdrawal federal income tax penalty of 10 percent, even if both you and the listed alternate payee are younger than age 59 1/2. However, if the QDRO is not properly established the funds are subject to the 10 percent early withdrawal tax.

In a divorce procedure that involves a QDRO settlement, an attorney may be able to assist in ensuring that it is properly established, especially when substantial assets are involved. In a well-known case, a man paid $1 million from his 401(k) plan as part of a settlement, assuming that the order had been properly set up. However, certain elements caused the order to be invalid. The IRS considered the settlement payment early distribution, and he was ordered to pay the 10 percent tax of $100,000.

Source: 401k.org, “401(k) and Divorce“, December 24, 2014