7.12 Court Distributions to Former Spouse Under a QDRO

As a part of a divorce-related property settlement, or to cover alimony or support obligations, a state domestic relations court can require that all or part of a plan participant’s retirement benefits be paid to a spouse, former spouse, child, or other dependent. Administrators of pension, profit-sharing, or stock bonus plans are required to honor a qualified domestic relations order (QDRO) that meets specific tax law tests. For example, the QDRO generally may not alter the amount or form of benefits provided by the plan, but it may authorize payments after the participant reaches the earliest retirement age, even if he or she continues working. A QDRO may provide that a spouse is entitled to all, some, or none of the spousal survivor benefits payable under the plan.

QDRO distributions to spouse or former spouse.

If you are the spouse or former spouse of an employee or self-employed plan participant and you receive a distribution pursuant to a QDRO, the distribution is generally taxable to you. However, if the distribution would have been eligible for rollover by your spouse or former spouse, you may make a tax-free rollover to a traditional IRA or to a qualified plan (7.7). If you do not make a rollover, and your spouse or former spouse (the plan participant) was born before 1936, a distribution to you of your entire share of the benefits may be eligible for special averaging, provided the distribution, if received by your spouse (or former spouse), would satisfy the lump-sum distribution tests (7.2). If the distribution qualifies, you may use Form 4972 to claim 10-year averaging, and possibly the 20% capital gain election (7.4). If your spouse (or former spouse) was born after 1935, you may not elect averaging or 20% capital gain treatment for the distribution. Transfers from a governmental or church plan pursuant to a qualifying domestic relations order are also eligible for special averaging or rollover treatment.

To create a valid QDRO, the court order must contain specific language. The recipient spouse (or former spouse) must be assigned rights to the plan participant’s retirement benefits plan, and must be referred to as an “alternate payee” in the court decree. The decree must identify the retirement plan and indicate the amount and number of payments subject to the QDRO. Both spouses must be identified by name and address.

If the above information is not clearly provided in the decree, QDRO treatment may be denied and the plan participant taxed on the retirement plan distributions, rather than the spouse who actually receives payments.

Distributions to a child or other dependent.

Payments from a QDRO are taxed to the plan participant, not to the dependent who actually receives them, where the recipient is not a spouse or former spouse.