Academic journal article Journal of Accountancy

QDROs Demand the Attention of CPAs: Well-Crafted Orders Can Ensure the Equitable Division of Retirement Assets in a Divorce

Academic journal article Journal of Accountancy

QDROs Demand the Attention of CPAs: Well-Crafted Orders Can Ensure the Equitable Division of Retirement Assets in a Divorce

Article excerpt


* 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.


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 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, EL. 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, PL. 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.

What Is a QDRO? …

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