Dividing up retirement-plan assets with a QDRO.

• Author: Ellentuck, Albert B.
• Position: Qualified domestic relations order

Facts: Tom and Glen & Henderson's recent divorce decree awarded her $2 million in cash from his interests in various qualified retirement plans sponsored by his employer. The decree did not specify the qualified plan from which the payment should be made, nor did it list Glenda's last-known address. Issues: What are the tax consequences of this provision in the Hendersons' divorce decree?

Analysis

When qualified plan assets (e.g., interests in profit-sharing, pension or Sec. 401(k) plans) are divided in a divorce, a qualified domestic relations order (QDRO) is critical for two reasons. First, payment of plan benefits to a participant's spouse or former spouse (other than through a QDRO) may violate the anti-alienation rules and, thus, cause disqualification of the plan. Plan administrators are given a certain period to decide whether an order meets the technical requirements of a QDRO before actually assigning some or all of the participant's benefits to another party, or making distributions to someone other than the plan participant.

Second, without a QDRO, distributions to someone other than the participant are treated as paid to that person on the participant's behalf. Thus, the participant woud be taxed on the distribution as if he had received it and then given the cash to the ultimate recipient. The participant would receive no deduction for the deemed transfer to the former spouse. Distributions under a QDRO, however, would be taxed to the actual recipient if he were the participant's spouse or former spouse.

These separate but related problems can arise in divorce situations when a state court orders an assignment of plan benefits to a nonparticipant spouse. However, an assignment of qualified retirement-plan benefits in connection with a separation or divorce made pursuant to a QDRO solves these problems.

A QDRO is a judgment, decree or order (including one approving a property settlement agreement) that meets the following requirements:

1. It provides for child support, alimony payments or marital property rights for a spouse, former spouse, child or other dependent of a qualified-plan participant and is made pursuant to a state domestic relations law (including a community property law).

2. It creates or recognizes the existence of the right of the individual named in the first item (i.e., the alternate payee) to receive all or a portion of a participant's benefits under a qualified retirement plan.

3. It clearly specifies the...