Retirement Assets and Divorce

It is widely understood that a divorcing couple must divide up their marital assets. In Maryland, Virginia, and the District of Columbia, that division is made according to the principles of equitable distribution. Under equitable distribution, all assets acquired by either spouse during the marriage (with limited exceptions) must be divided fairly between them. That requires determining first, what property counts as marital property; second, what the value of the marital property is; and third, what constitutes a fair and equitable division. An equitable distribution of property need not be exactly equal, but it is often fairly close.

Dividing retirement accounts in divorce is often challenging. It is not uncommon for a retirement account to be partly non-marital and partly marital, such if one spouse began contributing to an asset or participating in a retirement plan before the marriage. It may be difficult to determine what the value of the asset was as of the date of the marriage, and it is even harder to figure out what it may be worth in the future. In addition, certain types of retirement assets must be divided according to special rules; if the asset is not properly divided, one spouse could lose out on his or her share—potentially hundreds of thousands of dollars or more.

Retirement assets may make up a significant percentage of a divorcing couple’s wealth. As “gray divorce” becomes more common, this is especially true; divorcing spouses may have been participating in, or contributing to their accounts for decades. To make sure these assets are split fairly and according to legal requirements, it is important to work with an attorney who is experienced in dividing retirement assets in divorce.

How are Retirement Assets Split in Divorce?

How a retirement asset is divided in divorce depends on what type of account it is. Many employer-sponsored retirement plans are governed by the Employee Retirement Income Security Act, better known as ERISA, and must be divided using a Qualified Domestic Relations Order (QDRO). It is not enough for the divorce settlement or decree to state that a retirement asset will be divided. If the account is governed by ERISA, there must be a QDRO. If a retirement account is not governed by ERISA, other ways of dividing it will be required, some of which may involve a court order or other specialized documents.

Here’s why: a divorce decree is like a private law that governs the divorcing spouses and their conduct toward one another. But dividing an employer-sponsored retirement plan involves a third party not governed by the divorce decree: the retirement plan administrator, who must abide by ERISA’s rules and regulations where these apply, or some other similar system of rules otherwise. A QDRO is a court order that allows (in fact, compels) a plan administrator to divide retirement plan assets in divorce without penalizing the account owner for early withdrawal.

Which Retirement Accounts Must Be Divided With a QDRO?

ERISA-qualified plans which must be divided using a QDRO include:

• “Defined benefit” plans, such as pension plans
• “Defined contribution” plans, such as 401(k)s and 403(b)s to which the employer contributes
• Employee stock ownership plans (ESOPs)
• Profit-sharing plans

Plans which do not require a QDRO to divide include:

• Individual Retirement Accounts (IRAs), including Roth IRAs
• 403(b)s to which an employer does not contribute

In addition, certain specialized plans such as state or federal government retirement plans, international organization retirement plans, military plans, or other governmental agency type plans, have specific and sometimes complex rules governing division in divorce.

In general, if a private sector employer does not contribute to a retirement plan, it does not require a QDRO. Your divorce attorney can tell you if dividing your retirement asset in divorce requires a QDRO, some other form of court order, or any other type of specialized document.

How Does a QDRO Work?

Unfortunately, QDROs are not one-size-fits-all documents. While there are certain requirements of all QDRO mandated by law, it is best to obtain information from your plan administrator to be sure of your plan’s requirements. Based on the communication from the plan administrator, the divorce attorneys usually will draft a QDRO. Both divorcing spouses should agree that the QDRO reflects their consensus. The spouse who owns the plan is typically (but not always) referred to as the participant, and the spouse who is receiving part of the plan in the divorce is typically referred to as the alternate payee.

Sometimes a draft QDRO is submitted to the plan administrator for approval. The plan administrator may request changes, after which the QDRO must be resubmitted. When approved by the plan administrator, the QDRO can be signed by the participant and alternate payee and submitted to the judge for signature, after which it becomes a binding court order. The court clerk will file the order in court records. One of the attorneys must send a certified copy to the plan administrator, who will divide the plan according to the terms of the QDRO.

Typically, the alternate payee’s share of the plan assets will be transferred into a separate retirement account in the alternate payee’s name. However, in many instances, the alternate payee may be allowed to elect to withdraw in cash some or all of the funds to which they are entitled, in which case the plan may withhold income tax on the amount received in cash.

While it may sound like this process is fairly straightforward, in reality it can be complicated and drawn out, especially if one of the parties is uncooperative or unresponsive. Dividing retirement assets in divorce can be a complex process, especially if there are multiple types of assets. It is important to work with an experienced attorney who knows how to deal with these issues and can advise you of tax implications and other relevant considerations.

To learn more about retirement assets and divorce, contact Strickler, Platnick & Hatfield to schedule a consultation.