What Is IRS Code 414(p) for a QDRO?

Internal Revenue Code (IRC) Section 414(p) establishes the legal framework for a Qualified Domestic Relations Order (QDRO). A QDRO is a court order used to divide retirement plan assets, most often during a divorce. The law allows a retirement plan to pay benefits to someone other than the employee who earned them, without violating federal anti-assignment rules. This part of the tax code sets forth strict requirements that a state court’s domestic relations order must meet to be “qualified.” Only a qualified order can compel a retirement plan administrator to distribute funds to an alternate payee.

Defining a Qualified Domestic Relations Order

A domestic relations order is a judgment from a state court that addresses child support, alimony, or marital property rights. For this order to become a QDRO, it must satisfy the requirements of the Employee Retirement Income Security Act (ERISA). A QDRO recognizes the right of an “alternate payee” to receive all or a portion of the benefits payable to a “participant” under a retirement plan.

The participant is the employee or former employee who has earned benefits in the plan. The alternate payee must be a spouse, former spouse, child, or other dependent of the participant. This distinction affects the tax treatment of the distributed funds.

These rules apply to most private-sector retirement plans like 401(k)s and pension plans. Individual Retirement Arrangements (IRAs) are not subject to QDRO rules, and their division is handled differently through a divorce decree or property settlement agreement. Certain government and church plans also have their own distinct rules for dividing benefits.

Required Information for a Valid Order

For a domestic relations order to be recognized as a QDRO, it must contain specific information. Failing to include this basic identifying information can lead to a rejection of the order by the plan administrator. The order must also explicitly name each retirement plan to which it applies, as a general reference is not sufficient.

The order must specify the exact dollar amount or percentage of the participant’s benefit to be paid to the alternate payee. Alternatively, it can provide a clear formula for how the amount or percentage will be determined. The order must also state the number of payments or the period to which the order applies, providing clarity on the duration.

An order will fail to qualify if it requires the plan to provide a type or form of benefit, or any option, not otherwise available under the plan’s terms. It also cannot require the plan to provide for increased benefits or demand the payment of benefits to an alternate payee that have already been assigned to another alternate payee under a previously qualified QDRO.

The Plan Administrator’s Review Process

Once a domestic relations order is drafted and signed by a judge, it is submitted to the retirement plan administrator for qualification. Every plan subject to these rules is required to have established written procedures for handling QDROs. Many plan administrators provide model QDRO language or templates to assist parties in drafting a compliant order.

Upon receiving the order, the plan administrator must promptly notify the participant and all named alternate payees that it has been received. During the determination period, which can legally extend up to 18 months, the administrator reviews the order to ensure it meets all legal requirements and the plan’s own rules.

While the order is under review, the plan administrator has a duty to segregate or separately account for the amounts that would be payable to the alternate payee if the order were determined to be qualified. This action protects the funds in dispute. If the order is not qualified within the 18-month period, the administrator is permitted to pay the segregated amounts to the participant.

The process concludes when the plan administrator issues a formal notice of determination to all parties. This written notification will state either that the order has been deemed a QDRO or it will explain the reasons for its rejection. If an order is rejected, the parties can make the necessary corrections and resubmit an amended order for a new review.

Tax Consequences and Rollover Rules

The tax treatment of a distribution from a QDRO depends on the identity of the alternate payee. If the alternate payee is the participant’s spouse or former spouse, the distribution is taxable to them, just as if they were the original plan participant. The former spouse will receive a Form 1099-R and is responsible for reporting the income and paying the associated taxes.

Conversely, if the alternate payee is a child or other non-spouse dependent, the tax liability remains with the plan participant. In this scenario, the distribution is taxed to the participant, not the child or dependent who receives the funds. This distinction affects the tax planning for both the participant and the alternate payee.

A benefit of a QDRO is the special exception it provides to the 10% early withdrawal penalty. Payments made to an alternate payee from a qualified plan under a QDRO are not subject to this penalty, even if the recipient is under age 59½. This allows for access to retirement funds without the penalty associated with early distributions.

A spouse or former spouse who receives a QDRO distribution has rollover options. They can roll the funds directly into their own IRA or another eligible retirement plan, which continues the tax-deferral on the assets. This is a common strategy to avoid immediate taxation and continue growing the retirement savings. This rollover option is available only to spouse or former spouse alternate payees.