Domestic Relations Order (DRO)
A formal court order granted to the spouse or an alternative dependent during divorce proceedings or divorce conclusion. If approved, the spouse or dependent has the right to access part of or all the retirement benefits as stipulated in the employee's contract.
Domestic Relations Order (DRO) Details
According to the retirement equity act that falls under the Employee Retirement Income Security Act (ERISA), an employee's retirement benefit plan counts as an asset to the employee, spouse, or an alternative payee. As per the IRS, an alternative payee can be the spouse, ex-spouse, children, or other dependents. Since it is a shared asset, attornies must consider it when drafting up a settlement in the event of marital dissolution.
Drafting up a domestic relations order can be done in a few easy steps. At first, the attorneys of the parties involved draft up a version of the Domestic Relations Order as per their clients' wants. They will then consolidate the two plans and come up with one that is acceptable to both parties. The attorneys will then present the document to a judge who will sign of on it. Only after the judge signs the order that the attorneys can present it to the facilitator of the retirement plan; most times, it is the employer.
Some companies have Human Resource employees who are well-versed in pension laws; if not, they will outsource a plan administrator's services to come and review the DRO presented. The employer will review a checklist to ensure it meets the criteria stipulated by federal laws and the initial plan. However, the DRO is not always approved. An order is classified as unqualified for a myriad of reasons. Whatever the case, the plan administrator will notify the attorneys immediately with a list of reasons why it was rejected. The attorney should then take the said reasons into account, develop an alternative DRO and send it to the plan administrator or employer to reassess.
Example of a Domestic Relations Order (DRO)
Barbara and Ian have been married for ten years but are now getting a divorce. Ian has managed to amass an annual payment of $200,000 as his retirement benefits. Before he got married, his annual retirement benefit stood at only $100,000. This means that during the duration of their marriage, he has managed to double the figure. Barbara, on the other hand, is unemployed.
As per a DRO, Ian will pay Barbara $50,000 annually. Barbara was not there when he earned the $100,000 but was there when it doubled. Meaning she only indirectly contributed to $100,000.
Domestic Relations Order (DRO) vs. Qualified Domestic Relations Order (QDRO)
It is easy to confuse a DRO with a QDRO because they serve the same purpose. For a DRO to qualify, it needs to have the following information;
- The full name of the plan.
- The full names of the employer, the ex-spouse, and the plan participant.
- Social security numbers for both parties.
- The amount payable to the plan beneficiary and the method to be used to calculate the said plan.
- The timeframe for which the benefit is payable to the beneficiary and the intervals in which the payments are made.
- The method or median used to roll out the payments.
Federal laws stipulate that defined benefit plans, ESPOS, 401(K) Plans, or any other profit-sharing plan require a QDRO to distribute the benefits to the alternative payees fairly. After the attorney receives the confirmation that the DRO they presented is now qualified, they usually present the final copy to the judge presiding over the divorce.
If the judge agrees to the terms, they approve and sign the document, and the attorney can proceed to present it to the plan administrator or employee to begin processing the funds. After the funds' distribution begins, the ex-spouse is liable for any taxes acquired by the funds henceforth. The principal will be responsible for paying taxes for the money which goes to their account.