When do you need a QDRO?
Find out what a QDRO is and when and why you should use one when getting divorced in Connecticut.
When Connecticut residents get divorced, their settlements may require a variety of financial transactions to take place. One partner can be ordered to make spousal support payments or child support payments. It is also possible that one of the spouses will owe the other spouse a certain amount of money in order to complete the asset division portion of the divorce.
The funds for any of these obligations can come from several sources including 401(K) accounts. In some divorces, one person’s 401(K) account is split between both parties. All of these transactions should include the use of a Qualified Domestic Relations Order.
Understanding how retirement plans work
Even for married couples, a retirement plan is set up in one person’s name only. Distributions from the account are only allowed to be made to that legal owner. Therefore, if funds from a 401(K) account are required for the payment of spousal or child support or any form of a property division settlement, there must be a way to allow those funds to be paid to other parties. This is where the QDRO comes in.
As outlined by the Internal Revenue Service, a Qualified Domestic Relations Order creates another legal payee on the account for specific purposes. A QDRO is not needed with all types of retirement accounts. For example, Individual Retirement Accounts or Simplified Employee Pensions do not require the use of a QDRO. In contrast, any of these transactions involving a 401(K) should use a QDRO.
Who can be named as an alternate payee
The United States Department of Labor reports that not just anyone can be identified as an alternate payee via a QDRO. Only dependents, children, former spouses and current spouses can be named as the alternate payee. Payments must be to satisfy only child support, spousal support or marital estate division obligations.
Consequences of not using a QDRO
As Forbes reports, one man learned first-hand the downfall of not using a Qualified Domestic Relations Order. After withdrawing money from his 401(K) account at the direction of a family court judge to pay alimony to his ex-wife, he was required to pay 10 percent of the value taken out in taxes. Had a QDRO been used, this tax assessment may have been avoided.
Many nuances involved
The QDRO can be a very powerful ally to divorcing spouses in Connecticut. However, understanding all of the parameters is essential. For example, Forbes explains that approval from a plan administrator should be received prior to the finalization of the divorce. Working with an experienced divorce attorney is recommended in order to make sure that all procedures are properly executed.