One of the most vexing issues in a Michigan divorce is how the couple will split up any retirement plan benefits without incurring adverse tax consequences. A device that has helped many couples resolve this issue is what is called a Qualified Domestic Relations Order, or QDRO. QDROs can be very helpful to couples who earned significantly different amounts of money during the marriage.
How does a QDRO work?
A QDRO must satisfy certain requirements set forth by the Internal Revenue Service. If the requirements are met, a divorcing couple may split the benefits from certain types of retirement plans without incurring any adverse income tax liability. The QDRO must state the correct name and address of the participant in the plan and of anyone who will be receiving payments from the plan in the future; these individuals are called alternate payees. The QDRO must also state the amount or percentage of the participant’s benefits that will be distributed to each alternate payee. A QDRO may not award an amount or form of benefit that is not available under the plan.
The QDRO must be signed by both spouses and submitted to the court for approval. Assuming that the court approves the draft, the agreement is then sent to the plan administrator. Thereafter, the plan administrator will make payments to the participant and to all alternate payees in the amounts (or percentages) specified in the QDRO.
Payments pursuant to the QDRO are taxed to the participant if made to the participant or a child of the participant. If made to the former spouse, the payments are taxed as if the recipient were a plan participant. If a person receiving QDRO payments is an ex-spouse of the participant, the person can roll over the payment just as if the individual were a participant in his or her own plan.
Anyone who may be interested in setting up a QDRO may wish to consult an experienced divorce attorney who has drafted QDROs for other clients. A knowledgeable attorney will understand how to complete a QDRO without omitting any required information.