Federal law protects retirement savings held in a 401(k) plan. Under the Employee Retirement Income Security Act (ERISA), a participant's 401(k) benefit generally cannot be assigned to, or paid to, anyone other than the participant. This is called the anti-alienation rule.
A QDRO is one of the few exceptions. It's the only way a 401(k) account can be divided and paid to a spouse, former spouse, child, or other dependent as part of a divorce, legal separation, or support obligation. A divorce decree, settlement agreement, or verbal agreement between the parties isn't enough on its own — the plan can't divide the account until it receives an order it has determined to be qualified.
A domestic relations order is a judgment, decree, or order — including approval of a property settlement — made under state domestic relations law that relates to child support, alimony, or the marital property rights of a participant's spouse, former spouse, child, or other dependent.
The parties and their attorneys draft the order, a state court (or other state agency with authority) issues or approves it, and it's then submitted to the retirement plan administrator. The person who will receive a portion of the account under the order is called the alternate payee — typically a spouse, former spouse, child, or other dependent. If the alternate payee is a minor, the order should also identify their guardian or other legal representative.
Note: A DRO becomes a QDRO only after the plan administrator reviews it and determines that it meets all applicable requirements. Until that determination is made, it's a DRO — even if the court has already signed it.
To be qualified, an order must contain certain information and must not require anything the plan can't do.
For details on what information must be included in the order and what an order cannot require, log in to your participant dashboard to find the Gusto Qualified Domestic Relations Order (QDRO) Procedure. They can be found under Documents on your dashboard in the Resource Library tab and the Plan and Account Info subheading.
If you need assistance, please reach out to customer support at [email protected] or 1-888-344-5188, or review our support contact information.
If you are not a participant and do not have a Gusto retirement dashboard, you are welcome to reach out to customer support for a copy of the Gusto Qualified Domestic Relations Order (QDRO) Procedure at [email protected] or 1-888-344-5188, or review our support contact information.
A 401(k) is a balance-based plan, so dividing it is usually a matter of moving a dollar amount or a percentage of the balance. We recommend you review the Gusto Qualified Domestic Relations Order (“QDRO”) Procedure for details on dividing the 401(k) account.
A well-drafted order addresses each of the following:
Amount or percentage. Whether the alternate payee receives a flat dollar amount or a percentage of the vested account.
Assignment date. The date the account balance is measured. A percentage of the vested account balance cannot be calculated without a date to apply it to.
Earnings and losses. Whether the alternate payee's share is adjusted for investment gains and losses between the assignment date and the date the share is actually paid (the “Liquidation Date”). Account values change, so this matters.
Outstanding loans. Outstanding participant loans are not included in the vested balance being divided. The participant will remain responsible for repaying it.
Contribution sources. Whether the share comes proportionally from each money type in the account — pre-tax, Roth, after-tax, employer contributions — or from specific ones. This drives how the alternate payee will be taxed later.
Death before payment. What happens if the participant or the alternate payee dies before the share is separated or paid out.
Note: Plans differ in how they handle an alternate payee's share. Gusto Retirement requires that the alternate payee's assets be distributed or rolled over. The order should reflect what the plan actually allows.
When a plan receives a document claiming to be a DRO, it must make sure those funds aren't paid out while the review is underway. Gusto Retirement will place a hold on a participant's account once we're notified that a DRO is expected. This means the participant won't be able to request a distribution or loan until the DRO has been qualified and the distribution to the alternate payee is complete, or until 18 months have passed since notification without submission of a DRO.
Important: If an order is coming, please notify Gusto Retirement. If a participant takes a loan or distribution while an account is subject to a pending or existing order, there may be a shortfall that the participant is responsible for making whole.
A QDRO distribution doesn't create a taxable event by itself. Taxes depend on who receives the money, what they do with it, and what the DRO specifies.
These are general rules based on who is receiving the distribution, but can be overruled by the DRO.
Spouse or former spouse. The alternate payee is treated as the recipient for tax purposes. A cash disbursement is taxable to them, not to the participant, and pre-tax amounts taken as a cash distribution are generally subject to 20% federal income tax withholding. If they instead roll the amount over to an IRA or another employer plan (if permitted), they can defer the tax until they choose to cash out the funds.
Child or other dependent. The participant is generally treated as the recipient and is taxed on the payment, even though the money goes to the child or dependent.
10% early distribution penalty. A payment made to an alternate payee pursuant to a QDRO isn't subject to the 10% additional tax on early distributions, even if the alternate payee is under age 59½. This exception only applies to the original payment from the plan issued by Gusto Retirement. If the money is rolled into the alternate payee's own retirement account, later withdrawals follow the normal rules.
Roth amounts. Roth amounts included in a QDRO keep their Roth status. Whether a later withdrawal is tax-free depends on the usual qualified Roth distribution rules.
Reviewing a DRO and determining whether it's qualified is a plan administration function governed by ERISA, not an employer decision. The employer doesn't decide how the account is divided, isn't a party to the divorce, and shouldn't negotiate or interpret the order on behalf of either party.
If an employee asks the employer to divide an account, direct them to the plan's QDRO procedures.
Not by itself. A decree or settlement agreement can state that the account will be divided, but the plan still needs a DRO it can qualify.
In some cases, the decree itself contains everything required and can be submitted, though more often, a separate order is drafted.
The parties and their attorneys will draft the DRO, and retirement plans will review the order.
Many plans publish a model order to make it easier to prepare something that meets the requirements, but using it is optional. If you are a participant, go to your Gusto participant dashboard to review Gusto Retirement's Model QDRO. They can be found under Documents on your dashboard in the Resource Library tab and the Plan and Account Info subheading. If you are an alternate payee or outside counsel, you can contact customer support for a copy of the model QDRO at [email protected] or 1-888-344-5188.
Yes. A QDRO isn't limited to dividing marital property. It can also assign a portion of a 401(k) to satisfy child support or alimony obligations, subject to the same requirements.
No. IRAs aren't subject to the QDRO rules. An IRA is generally divided through the divorce decree or separation instrument as a transfer incident to divorce, which moves the assets to the former spouse's IRA without triggering tax. The mechanics are different, so don't assume QDRO language will work for an IRA.
A draft can usually be reviewed before it goes to the court, which can save time should you need to amend a certified order. However, a draft review doesn't qualify the order — a final, court-certified version still has to be submitted, which is typically provided after the divorce is final.
Pro tip: You can find Gusto Retirement's QDRO submission procedures here.
The plan will explain what needs to change, and the parties can revise and resubmit. Depending on what's wrong, the correction may need to go back through the court.
If you have submitted a court certified copy, the DRO may need to through the court again for revisions and approval.
If the DRO is a draft, the DRO may be amended by the participant or alternate payee’s counsel before submitting to the court.
Yes. An account can be subject to multiple orders over time. A later order can't reassign amounts an earlier QDRO already assigned to a different alternate payee.
Instead of consent, a court order governs this.
Separate from DROs, some plans require spousal consent for certain distributions and beneficiary designations, and a divorce can change who the default beneficiary is. Review beneficiary designations after a divorce.
This information is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances. You are advised to consult a qualified financial adviser or tax professional before relying on the information provided herein.