QDRO
A Qualified Domestic Relations Order (QDRO) is a court order, issued as part of a divorce or separation proceeding, that assigns a portion of a participant's ERISA-qualified retirement plan benefits to an alternate payee — typically a spouse, former spouse, child, or dependent — without triggering the plan's anti-alienation protections.
ERISA generally prohibits the assignment or alienation of qualified plan benefits, but the Retirement Equity Act of 1984 carved out an exception for domestic relations orders that meet specific statutory requirements. A QDRO must identify the plan by name, specify the amount or percentage of the benefit assigned to the alternate payee, the number of payments covered, and each plan to which the order applies.
Plan administrators are required to determine whether a domestic relations order constitutes a QDRO within 18 months of receiving it. During the determination period, the plan must segregate the amounts that would be payable to the alternate payee. If the order is ultimately deemed qualified, the segregated amounts are paid to the alternate payee; if not, they revert to the participant.
The tax treatment of QDRO distributions follows special rules. When the alternate payee receives a distribution directly from the plan, that distribution is taxable to the alternate payee at their own tax rate, not the participant's. The alternate payee can roll the distribution into their own IRA to preserve tax deferral. The 10 percent early withdrawal penalty does not apply to QDRO distributions to a spouse or former spouse, regardless of age — a significant benefit compared to ordinary early distributions.
QDROs do not apply to IRAs, which are not subject to ERISA. Instead, a transfer incident to divorce under IRC Section 408(d)(6) accomplishes a similar result for IRA assets: the transferred amount moves directly from one spouse's IRA to the other's without tax. This transfer must be pursuant to a divorce or separation instrument to qualify.