Often some of the most valuable assets owned by a married couple are the most difficult to distribute during divorce. Examples include the marital home and retirement benefits. Fortunately, if one of the spouses earned retirement benefits through a 401(k) plan, one way to provide for the division of these benefits is through a Qualified Domestic Relations Order.

A QDRO is an order issued by the court that provides for someone other than the individual who earned the 401(k) funds to be named as the recipient of the 401(k) assets. The only people who may be named alternate payees are spouses, former spouses, the person's child, or another dependent of the individual. The QDRO can be used for alimony, child support, or property rights payments, although depending upon state law, such as in community property states, the spouse may automatically be entitled to half of the 401(k).

The employee's retirement plan administrator must approve the QDRO, and it is important that the procedural requirements are met. To be valid, the QDRO must contain the owner's name and address, the name and address of the alternate payee, the percentage of the account that will be given to the alternate payee, how the percentage is going to be determined, the number of payments or time period the order will be in existence, and the 401(k) plan for which the order will be applicable.

When approved, the benefits awarded to the alternate payee become the payee's own retirement plan, with the same choices available to the alternate payee as the spouse to whom the 401(k) initially belonged.

The employee's 401(k) is affected based upon the terms of the QDRO. Tax consequences can be tricky when 401(k) retirement benefits are used as part of a divorce settlement, because a 10 percent early withdrawal fee can be imposed by the IRS if the benefits are paid to the spouse and the QDRO is not valid. However, for transfers through a valid QDRO, there is no early withdrawal penalty, a significant benefit to the transfer.

The plan must pay the spouse awarded the benefits through the QDRO as soon as the employee spouse is eligible for benefits, even if the employee's spouse decides to continue to work past retirement age. However, the benefits will be reduced until the original spouse retires.

This article is just a brief example of how retirement benefits can be divided during divorce. Anyone who has questions regarding a QDRO or other division of assets during divorce should consult with an experienced family law attorney.