A Qualified Domestic Relations Order, which is usually shortened to “QDRO”, is an order of a court that instructs the manager of a retirement plan to set aside and pay a portion of the funds to an alternate payee. These orders are fairly common in a divorce where one party has a significant more in their retirement accounts than the other.
For example, suppose in a divorce a husband has a great deal of money stored in a 401(k) plan, and much of that money was contributed during the course of the marriage. The portion of the investment that occurred while the parties were married would almost certainly be considered marital, and would be divided by the court. Rather than require the husband to cash out a portion of his 401(k), which would cause significant taxes and penalties, the court can issue a qualified domestic relations order, which will cause a portion of the retirement account to be set aside for the wife. The wife would be the “alternate payee”, in this case. She can then decide whether to have the funds paid to her later, or roll the funds to her own account, or cash it out and pay the penalties herself.
The actual QDRO is a fairly technical document that must comply with state law, federal law, and the requirements of the retirement plan. Sometimes it’s easier to try to offset the value of the retirement accounts with some other property or funds that the parties own. Often the possible tax penalties, benefits, or potential growth of the parties’ property needs to be evaluated and considered during negotiations.