As part of the property division settlement of a divorce, the spouses may agree to share the proceeds of one person’s retirement account.
As explained by Forbes, when that account is a 401K and subject to the Employee Retirement Income Security Act, the use of a qualified domestic relations order becomes very important.
What the QDRO does
According to the United States Department of Labor, the qualified domestic relations order establishes the spouse of the 401K account owner as an authorized payee on the account. This allows distributions per a divorce agreement to be made directly to the authorized payee. The account owner therefore avoids the assessment of both early withdrawal penalties and income tax on the money paid to the authorized payee.
The authorized payee also avoids early withdrawal fees and may avoid taxation at the time of receipt by reinvesting the money into another qualifying retirement account.
401K plan administrator approval
The administrator of the retirement account must review and approve all terms of the QDRO before the order can be completed and become part of the final divorce settlement. This includes a detailed itemization of the number of payments, the dollar amount or the percent of the plan’s value that must be paid to the authorized payee.
The QDRO for spousal or child support
A qualified domestic relations order may also be utilized to allow a 401K account owner the ability to access plan funds to satisfy an order for alimony or child support. Child support payments may be made to a guardian if the child or dependent is less than 18 years old.