QDROs demand the attention of CPAs

Well-crafted orders can ensure the equitable division of retirement assets in a divorce.

A key issue in separation, divorce, and other domestic relations proceedings is whether and how to divide a participant’s interest in a retirement plan. This is a recurrent issue in divorce proceedings, because more than 90 million workers in the United States actively participated in private employer-sponsored retirement plans as of 2011 (Department of Labor, Private Pension Plan Bulletin, June 2013, available at tinyurl.com/muvj2pr). It is a key issue because the interests of participants in employer-sponsored retirement plans usually are their largest assets.

The Employee Retirement Income Security Act (ERISA) of 1974, P.L. 93-406, accomplished its purpose of protecting the retirement assets of participants by establishing standards for operating qualified retirement plans and prohibiting assignment or alienation of a participant’s benefits to anyone other than the participant (ERISA Section 206(d)(1)). This provision, however, effectively blocked a nonemployee spouse from receiving a share of the participant spouse’s retirement benefits, even where state-approved domestic relations orders called for dividing retirement plans as part of equitable distribution in the divorce process.

The Retirement Equity Act of 1984, P.L. 98-397, resolved the disparity between ERISA and state law by allowing qualified plans subject to ERISA to segregate assets for the benefit of one or more “alternate payees” through a qualified domestic relations order (QDRO), a domestic relations order that meets all the requirements of ERISA and IRC Sec. 414(p). The consequences of not preparing a QDRO that satisfies these requirements can be financially harmful for one or both spouses, primarily because of the tax consequences.

A lawyer who practices family law usually takes the lead in drafting the QDRO, but he or she usually enlists one or more CPAs to apply their financial expertise to the QDRO provisions to ensure an equitable division of retirement assets between the divorcing spouses without triggering negative tax consequences.

While some CPA firms already have added divorce planning as a separate line of service, the market is not saturated. Developing expertise with QDROs is a natural lead-in to the broader service area of divorce taxation for CPAs because of their familiarity with pension requirements for both financial reporting and taxation. This article discusses the critical statutory requirements for QDROs, the financial consequences of not having a properly drafted or executed QDRO, and options to include in a QDRO for defined benefit and defined contribution plans to ensure an equitable division of retirement assets.


Sec. 414(p) defines a QDRO as a domestic relations order under state law that (1) creates or recognizes an alternate payee’s right to receive (or assigns to an alternate payee the right to receive) all or a portion of the benefits payable to a participant under a retirement plan and (2) meets certain other requirements (described below). The alternate payee may be a spouse, former spouse, child, or other dependent of a participant. The QDRO may relate to the provision of child support, alimony payments, or marital property rights for the benefit of one or more of these parties. ERISA neither permits nor requires retirement plan administrators to follow the terms of domestic relations orders unless they are QDROs.


To be qualified, a state-approved domestic relations order must include the following information:

  • The name and last known mailing address of the participant and each alternate payee;
  • Designation of each plan to which the order applies;
  • The dollar amount or percentage of (or the method to determine) the benefit to be paid to the alternate payee; and
  • The number of payments or period to which the order applies (ERISA Section 206(d)(3)(C); IRC Sec. 414(p)(2)).

A QDRO cannot require a plan to:

  • Provide an alternate payee or participant with any form of benefit or any option not otherwise provided under the plan;
  • Provide for increased benefits (determined on the basis of actuarial value); or
  • Pay benefits to an alternate payee that are required to be paid to another alternate payee under another order previously determined to be a QDRO (ERISA Section 206(d)(3)(D); IRC Sec. 414(p)(3)).

A QDRO must relate to a legal separation, marital dissolution, or family support obligation. Under ERISA, the retirement plan administrator is initially responsible for determining whether a domestic relations order is a QDRO. A plan administrator can provide the CPA access to plan and participant benefit information sufficient to help prepare a QDRO if the plan administrator determines that the disclosure request is being made in connection with a domestic relations proceeding.


Any distribution of a participant’s interest in a qualified retirement plan to an alternate payee that is not pursuant to a properly executed QDRO will create taxable income for the participant. If the distribution to the alternate payee is made pursuant to a properly executed QDRO, however, there generally are no tax consequences for the participant. Moreover, the alternate payee will not be taxed on the funds until he or she withdraws them from the retirement plan. The 10% early withdrawal penalty under Sec. 72(t) also will not apply to these withdrawals. In addition, an alternate payee who is a spouse or former spouse can roll the distribution over into his or her individual retirement account (IRA) without tax consequences if the rollover is done within 60 days of receiving the QDRO distribution.

The plan administrator is required to withhold 20% of the distribution for federal income tax purposes if the payment is made directly to the spouse or former spouse. The spouse or former spouse, however, can avoid this withholding by having the plan administrator transfer the funds directly to the trustee of his or her IRA. If the alternate payee is a child or other dependent of the participant, however, the participant will be treated as the payee and amounts will be withheld from the distribution unless the participant elects not to have the withholding rules apply.


As a member of the divorce planning team (which, besides the lawyer, may include a mediator, a forensic CPA, a therapist, and perhaps others), a CPA engaged to help with the QDRO should request from the administrator a summary plan description, plan documents, individual benefit and account statements, and any model QDROs developed for use by the plan. Because the administrator can assess reasonable expenses attributable to a QDRO determination against the retirement account of the participant who is a party to the domestic relations order, the CPA should participate in the preparation of the QDRO to reduce the time and expenses associated with a plan administrator’s determination of the qualified status of an order. The CPA also should ensure that there is a process for providing preliminary or interim reviews of orders. The CPA is there to reduce multiple submissions of deficient orders and, therefore, the burdens and costs to plans associated with plan administrators’ review of the orders.

The CPA also should explain to the alternate payee any right to elect the form in which benefits will be paid under the plan. The client must understand that there is no single “best” way to divide retirement benefits in a QDRO. The best way for each case depends on many factors, including the type of retirement plan, the nature of the participant’s retirement benefits, and the reasons the parties want to divide those benefits. In deciding how to divide a participant’s retirement benefits in a QDRO, it is also important to recognize that those benefits consist of two types: (1) the benefit payable to the participant for retirement purposes (the “retirement benefit”) and (2) the benefit payable on behalf of the participant to someone else after the participant dies (the “survivor benefit”).

QDROs are generally used either to provide temporary or permanent support to the alternate payee (e.g., a spouse, former spouse, or child or other dependent) or to divide marital property in the course of dissolving a marriage. The differing goals often result in different choices in drafting a QDRO.


Two common approaches used to split the benefit payments under defined contribution plans and defined benefit plans are “shared payment” and “separate interest.”

Shared-payment approach. This approach to splitting retirement plan payments gives the alternate payee part of each benefit payment made to the participant. Thus, the alternate payee does not receive any payments until the participant receives payments. This approach is particularly useful if the participant already is receiving payments when the QDRO is prepared.

A shared-payment QDRO needs to stipulate the amount or percentage of each payment that the alternate payee will receive. Including a formula for determining the amount the alternate payee will receive also is an acceptable way to indicate how the benefit payments should be shared. In addition, the QDRO should include provisions stipulating the number of payments to be made to the alternate payee or how long these payments will be made. The beginning and ending dates for making payments to the alternate payee usually are needed when the QDRO is used to provide child support or alimony. The start date for child support often is the date a DRO becomes a QDRO, while the age of maturity or an age that allows the child to finish college are common ending dates. The ending date for a QDRO used to pay alimony to a former spouse could be the earlier of the date the former spouse remarries or dies.

Separate-interest approach. Instead of splitting each payment, this approach gives the alternate payee an interest in the participant’s retirement benefit that is not tied to the participant. Within the constraints of the pension plan itself, the separate-interest approach allows the alternate payee to decide when, and in what form, he or she will receive benefit payments.

A separate-interest QDRO will need to stipulate the dollar amount, percentage of total benefits, or formula that leads to the payment amount the alternate payee will receive. Similar to a shared-interest QDRO, the separate-interest QDRO can stipulate the number of payments that the alternate payee will receive or the period over which the payments will be made. Alternatively, the separate-interest QDRO can simply provide that the alternate payee can decide when and in what form to receive benefit payments, provided the alternate payee’s decision is consistent with the plan’s provisions for distributions to participants.

In addition to determining whether and how to divide the retirement benefits, a CPA should consider whether to give the alternate payee a right to survivor benefits or any other benefits payable under the plan.


A CPA can read the plan’s summary plan description and other plan documents to determine the retirement benefits provided and whether the plan is a defined benefit plan or a defined contribution plan. A defined benefit plan normally uses an actuarial formula that takes into consideration such factors as the expected salary, remaining work life, and expected life of the participant, and the expected rate of return on plan assets to determine the amount and timing of benefit payments. Some defined benefit plans provide for lump-sum payments.

Instead of stipulating the benefits as in a defined benefit plan, a defined contribution plan establishes a separate account for each participant, and the employer generally agrees to put a specific amount into this account. The participant also may contribute to the fund. The size of a participant’s account at any time, including the retirement date, depends on the contributions that have been made to the account and the gains and losses realized from the investment of these contributions. While the employer assumes the risk of having sufficient funds available to pay employees their promised benefit under defined benefit plans, defined contribution plans shift this risk to plan participants—and, thus, to alternate payees.

Defined benefit plans are the traditional pension plans provided by companies, while defined contribution plans include some of the more recent types of pension plans employers offer employees (e.g., Sec. 401(k) and Sec. 403(b) plans and employee stock ownership plans (ESOPs)). A QDRO, however, cannot be used to split an IRA between the divorcing parties. Defined contribution plans usually allow lump-sum benefit payments to alternate payees, but some also provide for a stream of payments over the payee’s lifetime after retirement.


An order dividing the retirement benefits under a defined contribution plan may adopt either the separate-interest approach or the shared-payment approach. Orders that provide the alternate payee with a separate interest, either by a percentage or a dollar amount of the account balance as of a certain date, often also stipulate that the separate interest will be held in a separate account under the plan or that the alternate payee will be entitled to exercise the normal rights under the participant’s plan.

Orders that provide for shared payments from a defined contribution plan should clearly establish the amount or percentage of the participant’s payment that will be allocated to the alternate payee and the number of payments or period during which the allocation is to be made. A QDRO can specify that the participant and the alternate payee share some or all payments made to the participant.

The retirement benefit an alternate payee receives under a defined contribution plan depends on the participant’s account balance and whether the QDRO includes provisions that guard against events and circumstances that erode the balance. If the balance in the account contains investments that the alternate payee believes are too risky, the QDRO should specify the particular investments that the plan administrator should use in determining growth in the alternate payee’s share of the account balance.

The QDRO also should address any other events or circumstances that could decrease the account balance and, thus, decrease the retirement benefit of the alternate payee. For example, the QDRO should specify the basis for dividing gains and losses assigned to the participant’s account between the date the plan administrator approves the QDRO and the date benefit payments begin. In addition, the QDRO should address the alternate payee’s right to any extra benefits afforded the participant in the years following the divorce (e.g., cost-of-living adjustments and early-retirement incentives). The alternate payee also will want to include a provision specifying the procedures to follow if the payment amount falls short of the benefit allocation.

Plan loans. If a qualified retirement plan allows loans, the QDRO can give the alternate payee the right to borrow from the plan. The amount borrowed by the participant and the alternate payee is taxable as a distribution unless the loan amount, plus the total of all prior outstanding loans, does not exceed the lesser of (1) $50,000 (reduced by any excess of the highest outstanding loan balance during the one-year period before the date the loan was made, over the outstanding balance on the date of the loan), or (2) the greater of (a) $10,000 or (b) one-half of the nonforfeitable accrued benefit to the participant (Sec. 72(p)(2)(A)). The first-in-time loans are nontaxable up to this limit.


As previously noted, a QDRO should stipulate the alternate payee’s share of each benefit payment (a flat dollar amount or a percentage of the total payment) for which the participant qualifies. Even if the participant continues to work after the retirement date stipulated in the plan, the alternate payee can access his or her share of the benefits at that point.

As with defined contribution plans, the QDRO should address the alternate payee’s right to any extra benefits afforded the participant in the years following the divorce. If the defined benefit is a stipulated dollar amount rather than a set percentage, the alternate payee will want to include a provision that defines the allocation procedures to use if plan assets fall short of the stipulated dollar amount.

Since most CPAs are skilled in completing due diligence on a variety of technical issues, they should be capable of searching plan documents and gathering information from the plan administrator about the participant’s retirement benefits, as well as the rights, options, and features available under the plan.

The CPA also will want to find the earliest time that the alternate payee can receive benefits. As noted above, a shared-payment QDRO can (and should) set the date that payments to the alternate payee begin. This date, however, cannot precede the date the plan administrator receives the order for approval. A separate-interest QDRO can designate a time for the alternate payee to receive the separate interest, or it can give the alternate payee the same timing options available to the participant. Unless a plan specifically allows payments at an earlier date, the participant cannot begin receiving benefit payments before reaching his or her “earliest retirement age.” Sec. 414(p)(4)(B) defines earliest retirement age as the earlier of (1) the date on which the participant qualifies for benefit payments under the plan’s provisions; or (2) the later of the date the participant reaches age 50 or the earliest date the participant can begin receiving benefits if the participant no longer works for the employer. Some retirement plans allow alternate payees to elect to receive a lump-sum payment of the separate interest at any time. The CPA should consider the terms of the retirement plan, the views of the plan administrator, and the participant’s age to find the earliest retirement age applicable to the plan to which the QDRO applies.


ERISA Section 205 and IRC Secs. 401(a)(11) and 417 require that all retirement plans (both defined benefit and defined contribution plans) provide benefits in a manner that will give the participant’s spouse a survivor benefit. Plans also may specify survivor benefits. To decipher these benefits, the CPA should read the plan’s summary plan description and other plan documents. Under federal law, for defined benefit plans and certain defined contribution plans, a married participant on the participant’s “annuity starting date” is entitled to receive a qualified joint and survivor annuity (QJSA) unless the participant can get the spouse to agree to another option. The QJSA authorizes the retirement plan to make periodic payments to the participant until his or her death and then make periodic payments to the surviving spouse for his or her remaining life. If the participant with a nonforfeitable benefit dies before payments begin, the plan must pay the surviving spouse a qualified preretirement survivor annuity (QPSA) for the remainder of his or her life.

As noted above, only certain defined contribution plans are required to make QJSA and QPSA payments of retirement benefits to the surviving spouse. Defined contribution plans not required to make QJSA or QPSA payments (which includes most Sec. 401(k) plans) instead, at the participant’s death, must distribute the entire account balance to the surviving spouse.

If the participant divorces before receiving benefit payments and then remarries, the second spouse, not the first one, is entitled to receive survivor benefits. A QDRO, however, can keep this from happening by requiring that the retirement plan treat the first spouse as the participant’s surviving spouse. The first spouse will receive the benefits in the form of a QJSA or QPSA unless he or she agrees to another option proposed by the participant.


QDROs almost always will be complicated, but CPAs have the skills to investigate and address the burdensome issues before the attorney drafts the QDRO. Teamwork presents an opportunity to avoid costly mistakes and save both parties to the divorce the disastrous consequences of an improperly drafted or executed QDRO. 


A qualified domestic relations order (QDRO) allows an employee’s retirement plan to pay benefits to an ex-spouse named as alternate payee. CPAs’ financial expertise can provide value to a legal team drafting a QDRO.

A QDRO relates to a legal separation, marital dissolution, or family support obligation. Guided by a CPA adviser, the alternate payee can elect the form in which to receive benefits, generally under either a “shared payment” or “separate interest” approach. The former divides payments by amount or percentage; the latter provides an interest in the plan benefits that allows the alternate payee to elect how to receive benefits. A shared-payment QDRO should set the date when payments to the alternate payee may begin.

Since defined contribution and defined benefit plans have differing benefit mechanisms, the considerations in splitting them differ. Both types of plans can offer the separate-interest or the shared-payment approach to split the benefits.

When a plan participant has remarried before receiving benefits, a QDRO can be useful in stipulating that survivor benefits are payable to the ex-spouse. Otherwise, the second spouse is entitled to receive the survivor benefits.

Ray A. Knight ( knightra@wfu.edu ) is a visiting professor of accountancy, and Lee G. Knight ( knightlg@wfu.edu ) is the Hylton Professor of Accountancy, both at Wake Forest University in Winston-Salem, N.C.

To comment on this article or to suggest an idea for another article, contact Paul Bonner, senior editor, at pbonner@aicpa.org or 919-402-4434.


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