In general, your 401(k) plan balance is protected from creditors (aka anti-alienation), and you are unable to give your plan balance away or use it as security for a non-plan loan (aka anti-assignment) without first taking a distribution from the plan. But a distribution typically leads to additional taxable income for you as well as the possibility of an early withdrawal penalty tax if you do not meet an exemption.
However, one exception to both of these rules is when the account is covered by a domestic relations order (DRO) that meets all of the requirements under the law to be considered a qualified domestic relations order (QDRO).
Here are highlights of the QDRO process and requirements, but you can find full procedure documentation under Your Plan Information within the Resource Library of your dashboard.
How do I get a DRO?
A DRO is approved by a state agency, typically a court, during divorce or legal separation. It is usually drafted by the parties and approved by the court. This DRO will be submitted to the plan administrator.
Find more information on submitting a DRO for review and qualification determination with Guideline.
Because there are specific things that must be included in a DRO, Guideline provides a model QDRO that you and your legal counsel can use to assist in drafting your DRO. The model QDRO and full procedures can be found under Your Plan Information within the Resource Library.
What must be included in a DRO?
In general, the DRO must include all of the information the plan administrator needs to accurately determine the benefit due to the alternate payee.
Typically, the DRO must clearly lay out:
Who will be assigned the benefit – this is referred to as the “alternate payee,” which is typically a spouse, former spouse, child, or other dependent
How the benefit amount will be determined (e.g., percentage of the balance on a given day or specific dollar amount)
How the benefit will be distributed
For example, if the alternate payee should receive 50% of the account balance, the DRO must specify information like the date that balance is determined and how any outstanding loans will be treated.
What can a DRO require?
While the parties have a lot of discretion when determining how a retirement account will be treated under a DRO, there are some limitations. Namely, the DRO cannot require anything that is not allowed under the plan document.
For example, if the plan does not allow for installment payments, the DRO cannot require that the alternate payee receive $250 per month. You can find general information about your plan that may be helpful in drafting the DRO in the Summary Plan Description.
Please note that Guideline is unable to establish separate accounts for alternate payees. DROs that require such an account be established will not be qualified and will need to be adjusted and resubmitted.
Who can be an alternate payee?
An alternate payee can be the spouse (in the case of a legal separation), former spouse (in the case of divorce), children, or other dependents of the participant. In the case of an alternate payee that is a minor, the DRO should also specify who the guardian is for the minor child(ren).
Who decides if the DRO is a QDRO?
The plan administrator (Guideline) will determine if your DRO meets the requirements to be considered “qualified.” If your DRO does not meet the requirements, you will be provided with details on what needs to be fixed and have the opportunity to adjust and resubmit the DRO.
How can I find out more information about Guideline’s procedures?
You can find additional information on submitting a DRO here. You can also find the full procedures and model QDRO under Your Plan Information within the Resource Library.
Will my account be affected if Guideline receives notice that a DRO will be submitted?
Yes. When Guideline receives written notice that there is a pending domestic relations action (e.g., divorce or legal separation) and there is a reasonable belief that a DRO will be submitted, no distributions or loans will be permitted.
In general, the restriction will remain in place for 18 months or until the DRO has been received. Please see Guideline’s QDRO procedures for more detailed information on what constitutes acceptable notice and when the restriction can be lifted.
This information is general in nature and is for informational purposes only. It should not be construed as legal advice. Participants and alternate payees should consult a legal advisor when preparing a DRO.