Definition
A Domestic Relations Order (DRO) is a decree or order issued by a domestic relations court that allocates a portion of an individual’s retirement benefits to their spouse, child, or other dependent. This can occur as part of legal separations, divorces, child support, or spousal maintenance proceedings. The order gives the ex-spouse or dependent the right to receive benefits from the retirement plan.
Phonetic
Domestic: dəˈmɛstɪkRelations: rɪˈleɪʃənzOrder: ˈɔːrdərDRO: diː aːr oʊ
Key Takeaways
<ol> <li>A Domestic Relations Order (DRO) is a legal decree, usually in a divorce settlement, that allocates a percentage or specific amount of an individual’s retirement benefits to their divorced spouse. It requires an individual to give a portion of their retirement benefits to another individual, typically an ex-spouse.</li> <li>DROs are recognized by the Employment Retirement Income Security Act (ERISA), state and local governments, military retirement pay and the federal government’s thrift savings plan to a certain extent. They ensure that the ex-spouse or alternate payee can receive their designated share of the retirement benefits, even if the primary benefit holder pre-deceases them.</li> <li>Lastly, a DRO isn’t official until it’s been approved by both the retirement plan and the court. So, it’s crucial for the details to be correctly outlined and officially signed into order. If not done correctly, the order can be rejected, delaying the payment process.</li></ol>
Importance
A Domestic Relations Order (DRO) is of significant importance in finance and business, specifically in the context of pension benefits and divorce settlements. It is a judicial decree that recognises the legal right of a spouse, ex-spouse, child or other dependent of a participant in a retirement plan to receive a portion of the benefits payable under the plan. It helps provide financial security and stability by legally ensuring the division and allocation of these benefits. DROs are crucial in safeguarding the financial rights of dependents during separations, preserving the equitable distribution of retirement assets. Without a properly established DRO, an ex-spouse or dependent could potentially lose their rightful share of pension benefits.
Explanation
The primary purpose of a Domestic Relations Order (DRO) is to serve as a legal tool to ensure that specific rights pertaining to a retirement plan are assigned to an alternate payee, typically an ex-spouse or a dependent, after legal separations such as divorce or annulment. It is a judgement, decree, or order that recognizes the payee’s right to receive benefits from a participant’s retirement plan, under a domestic relations law. The DRO aims to provide a smooth and legally-binding manner of transferring potential retirement benefits to ensure the financial stability of the participant’s dependents. In terms of its functionality, a DRO guides the retirement plan in understanding how to distribute or split the retirement benefits. It must specify required details including the name and last known mailing addresses of the participant and each alternate payee, the amount or percentage of the participant’s benefits to be paid to each payee and so on. If the DRO satisfies the requirements of a specific retirement plan, it is deemed as a Qualified Domestic Relations Order (QDRO). This distinction is significant as QDRO allows the payee to receive benefits as if they were a participant of the plan, ensuring that individuals legally separated from the participant, whether through divorce or otherwise, have access to the financial resources they need.
Examples
1. Divorce Settlement: Bob and Sue have recently decided to end their marriage. They both have been contributing to their joint retirement fund for quite some time. Their divorce lawyer suggests getting a Domestic Relations Order (DRO) to outline how the nonparticipant spouse, Sue in this case, will receive a portion of Bob’s pension payments since they may not be divided without a DRO during their divorce settlement.2. Child Support Settlement: Amy is a single parent and her ex-spouse, John, works in a corporation and has an established retirement plan. As a part of their child support settlement, the court issues a Domestic Relations Order to ensure a portion of John’s retirement benefits would be diverted to Amy for child support payments.3. Alimony Payments: After many years of marriage, Michelle and David decide to part ways. As part of the divorce proceedings and alimony settlement, a Domestic Relations Order is issued to ensure Michelle, who was financially dependent on David during the marriage, is still able to receive financial support from David’s pension plan, ensuring a consistent income stream even after the divorce.
Frequently Asked Questions(FAQ)
What is a Domestic Relations Order (DRO)?
A Domestic Relations Order (DRO) is a judgement, decree, or order that is made pursuant to state domestic relations law and assigns the right to receive a portion of retirement benefits to an alternate payee.
Who usually requests for a Domestic Relations Order (DRO)?
Typical requesters of a DRO are usually the spouses, former spouses, children, or other dependents of a participant in a retirement plan.
What is the purpose of a Domestic Relations Order (DRO)?
The primary purpose of a DRO is to provide for equitable distribution of property rights, particularly retirement benefits, in the event of divorce, legal separation, or other domestic dispute under state law.
What information is typically included in a Domestic Relations Order (DRO)?
A DRO typically includes information such as the name and last known mailing address of the participant and each alternate payee, a clear description of the amount or portion of benefits to be paid to the alternate payee, and the number of payments or the time period to which the order applies.
Can a Domestic Relations Order (DRO) be modified?
Yes, a DRO can be modified by the court that originally issued it. However, any modifications must also comply with the specific requirements of the Employee Retirement Income Security Act (ERISA) and the plan administrator’s procedures.
What happens if a Domestic Relations Order (DRO) is rejected?
If a DRO is rejected, the plan administrator must promptly notify the participant and each alternate payee of the rejection and the specific reasons why. The involved parties will then generally be given an opportunity to correct the order.
Does a Domestic Relations Order (DRO) apply to all retirement plans?
No, a DRO only applies to specific types of retirement plans that are covered under the Employee Retirement Income Security Act (ERISA). It does not apply to plans like IRAs and government or military pensions which are governed by different rules and regulations.
Do I need an attorney to obtain a Domestic Relations Order (DRO)?
While it’s not absolutely necessary, it is often strongly advised to seek legal counsel when dealing with a DRO due to the complexities of pension law and the specific requirements that must be met for a DRO to be considered qualified.
Related Finance Terms
- Qualified Domestic Relations Order (QDRO)
- Pension Plan
- Divorce Settlement
- Marital Property Division
- Retirement Assets
Sources for More Information
