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Domestic Relations Order (DRO)

A formal order granted in court during a divorce proceeding or conclusion

What is a Domestic Relations Order (DRO)?

A domestic relations order (DRO) is a formal order granted in court during a divorce proceeding or conclusion. The order gives a spouse or selected dependent of an individual or employee with a qualified retirement plan the right or access to a portion or all of the respective employee’s or individual retirement plan benefits.

 

Domestic Relations Order (DRO)

 

DROs are typically sent to an employer or a plan administrator. The individual (employer or plan administrator) reviews the domestics relations order and ensures that it meets all required and relevant laws for approval.

If the DRO is considered to be approved, the retirement plan benefits will be distributed to the relevant parties, as per the proportions stipulated in the order. Normally, the relevant parties are an employee and his or her spouse.

 

Summary

  • A domestic relations order (DRO) is a formal order granted in court during a divorce proceeding or conclusion.
  • Domestic relations order (DRO) reviews are handled by plan administrators or the employer of the individual who holds the retirement plan.
  • A Qualified Domestic Relations Order (QDRO) is a DRO that was issued by a court that handles domestic relations.

 

DRO Review Process

Domestic relations order (DRO) reviews are handled by plan administrators or the employer of the individual who holds the retirement plan.

Normally, the company at which the plan holder is employed will employ a human resources department that is responsible for handling DROs. The department is staffed by employees who are well informed and educated on pension laws or they recruit an external plan administrator to assess and review the DRO.

After a domestic relations order is sent to the plan administrator or the company/employer’s HR department, the employer or administrator assesses the order based on a checklist which is used to make sure that the retirement plan of the employee is eligible to be qualified.

There are cases where a DRO is deemed unqualified. Retirement plans come with terms and conditions that may not support the DRO.

Federal laws are also a factor in the qualification of a domestic relations order, as the terms of the DRO must comply with the laws for the DRO to be qualified.

In such a case, where the DRO’s terms do not comply with state laws or are not supported by the terms or structure of the retirement plan, the reviewer of the DRO will alert the attorney of the beneficiary and provide justification as to why the DRO may be unqualified.

The DRO can be revised by the attorney and resent to the reviewing party or parties for reassessment.

 

Qualified Domestic Relations Order (QDRO)

A Qualified Domestic Relations Order (QDRO) is essentially a DRO that was issued by a court that handles domestic relations.

The DRO must have been reviewed by a plan administrator or a human resource representative of an employer to ensure that it is compliant with ERISA, the terms of the plan, and all other appropriate laws.

Once the DRO is deemed to be compliant, it is considered to be QDRO.

QDROs must include information such as the legal name of the plan, full names, addresses, and social security numbers of the plan participant (employee) and alternative payee (spouse, ex-spouse, or dependent), plan identification number, the amount payable to the alternative payee and calculation of the amount, and defined benefit payment plan on how and when the benefit payable to the alternative payee will be made.

 

Regulations that Govern DROs (Public Sector Employees)

Depending on the country and jurisdiction that the involved parties live in, the laws that define which policies and other financial instruments are regarded to be assets for public sector employees may differ.

The Employee Retirement Income Security Act (also known as ERISA) of 1974 is a federal law that establishes the minimum requirements for private industry health and retirement plans. The act aims to safeguard the interests of the persons in such plans.

The Retirement Equity Act of 1984 (or REA), which is a derivative of the ERISA, sets forth that a public employee’s retirement plan benefits are regarded as an asset for that employee. The employee usually has an alternative person listed, to whom the benefits are payable in his or her absence or as bound by law.

Hence, the alternative person (who is formally known as an alternative payee) can either be a dependent, a spouse, or an ex-spouse, as set forth by the IRS. In a situation where there is a divorce proceeding, the asset (which, in this case, is the retirement plan) is also considered for the division or allocation of assets.

 

More Resources

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Asset Protection
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  • Power of Attorney
  • Alimony

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