Handling QDROs in your ESOP

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Tue, Dec 04, 2012
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A domestic relations order (DRO) is a judgement, decree, or order that is made pursuant to state domestic relations law that relates to the provision of child support, alimony payments, or maritial property rights for the benefit of a spouse, former spouse, child, or other dependent of a participant.

Plan Administrator Responsibilities

Under Federal law, the Plan Administrator has specific responsibilities and duties with respect to determining whether a DRO is a qualified domestic relations order (QDRO).  Once deemed a QDRO, the order splits and changes ownership of a retirement plan, including account balances in an ESOP, to give the divorced spouse or other alternate payee their share of the participant's account.  QDROs apply only to employee benefit or pension plans subject to ERISA, the Employee Retirement Income Security Act, the American law governing private sector pensions. 

In order for a DRO to be constituted a QDRO, the DRO must include specific information and meet certain other requirements.  In administering all orders received, the Plan Administrator should be completing the following activities:

  • Establish reasonable procedures to determine the qualified status of domestic relations orders and to administer distributions pursuant to qualified orders

  • Review the plan document and SPD to determine what the plan allows for distribution timing and fee allocations for the respective individuals

  • Send written notification to the affected plan participant and the alternate payee or payees named in such order that the order has been received and furnish a copy of the plan's procedures for determining the qualified status of such order

  • Review the DRO and document their review to determine it has met the requirements needed to be a QDRO.  Certain information must be in a DRO to qualify as a QDRO under ERISA.  Likewise, certain information must not be in a DRO to qualify as a QDRO under ERISA

  • Calculate the retirement plan account split and inform the participant and the alternate payee of their account balance


    Qualified Domestic Relations Order (QDRO) Tip Sheet


QDRO Distribution Timing

The ESOP Plan document will dictate when a QDRO is eligible for a distribution.  Typical options you’ll find in the plan document are as follows:

1.  “Earliest retirement age” rule - Under this process, the QDRO is eligible for a distribution as soon as the employee reaches the earliest retirement age, as defined in IRC §414(p)(4)(B):

For purposes of this paragraph, the term “earliest retirement age” means the earlier of—

(i) the date on which the participant is entitled to a distribution under the plan, or

(ii) the later of—

(I) the date the participant attains age 50, or

(II) the earliest date on which the participant could begin receiving benefits under the plan if the participant separated from service.

2.  Immediate distribution to the QDRO

3.  Delayed distribution to the QDRO until the employee is eligible for a distribution

QDROs: The Division of Retirement Benefits Through Qualified Domestic Relations Orders

For more information on QDROs, the Employee Benefits Security Administration (EBSA) of the U.S. Department of Labor prepared a QDRO booklet to provide general guidance about QDROs to employers, retirement plan administrators, participants, beneficiaries, employee benefit professionals, and domestic relations specialists.  The booklet has three chapters covering the following information:

  • General overview of the QDRO provisions and the basic rules governing the content of QDROs

  • Duties of retirement plan administrators in making QDRO determinations and in administering retirement plans for which related QDROs have been issued

  • Issues to be considered in drafting a QDRO


Topics: ESOP distributions, ESOP Administration, Plan Document

Aaron Juckett, CPA, CPC, QPA, QKA
Written by Aaron Juckett, CPA, CPC, QPA, QKA

Aaron is President and Founder of ESOP Partners and provides implementation, administration, and consulting services to hundreds of companies. He is a member of The ESOP Association (TEA) and the National Center for Employee Ownership (NCEO).

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