Dividing Retirement FAQ

It’s best that an attorney draft the QDRO (Qualified Domestic Relations Order) in order to avoid costly mistakes. The spouse receiving funds by way of a QDRO is typically the spouse who pays the legal fees to have the Order drafted, and that spouse’s attorney usually conducts all of the legal work associated with drafting and filing the QDRO. In order to avoid the legal fees associated with drafting a complex QDRO, a spouse entitled to the retirement funds may accept other assets to supplant the retirement assets. For example: if a wife is entitled to $100,000 from her husband’s qualified 401(k), she might prefer to take a lump sum in that amount from a non-retirement account, or even receive an asset worth $100,000. That way, the wife will still receive the full $100,00 that she’s owed and she avoids paying her attorney to draft a QDRO.

QDRO stands for Qualified Domestic Relations Order. This is a legal instrument signed by a judge that allows a spouse to assign their rights in a retirement plan to another spouse. In order to avoid a tax penalty and effectively divide a qualified plan – including pension plans, profit-sharing plans, and 401(k) plans – the Court must enter a QDRO. Without a QDRO, a withdrawal from such a plan would trigger a tax event.

An attorney should draft a QDRO to include specific language instructing the plan administrator as to how the funds should be dispersed. The QDRO must include: the name of the plan, the name and last known mailing address of the participant, the name and mailing address of the participant, the name and mailing address of the alternate payee (spouse of employee), the amount to be paid, the manner in which the payment is to be determined, and the number of payments or period to which the order applies. Once drafted, the QDRO will be submitted to the court for judge’s signature, and it will subsequently be sent to the plan administrator.

Military retirement earned during the course of the marriage is considered marital property, which is fair game in equitable distribution. In order for a non-military spouse to receive payments from the federal government, a “10/10” requirement must be met. The spouses must have been married for at least 10 years during the period in which the military-spouse was on active duty. It is important to note, that even if the 10/10 requirement is not met, military retirement is still subject to division. This requirement only places a limitation to non-military spouses receiving payments directly from the federal government.

Withdrawing funds from your retirement account in order to give a portion to your former spouse will create tax implications; however, there are ways to divide a retirement account without a tax penalty.

In dividing an IRA, the division must reflect that it is actually a transfer or “rollover” of funds to your former spouse. By structuring such a transaction as a transfer, you will be able to avoid tax consequences. In order for your former spouse to avoid classifying the transfer as taxable income, the transfer should be deposited into an IRA account or other eligible retirement account.

If you are dividing qualified employer plans such as 401(k)s, pensions, and SEP IRAs, the best way to ensure that transferring all or a portion of the funds to a former spouse doesn’t result in tax penalties is to obtain a Qualified Domestic Relations Order (QDRO). A QDRO is a legal instrument, signed by a judge, that allows for a person to assign rights in a retirement account to another person. Once again, the funds received by the former spouse must be deposited into another retirement account to avoid any tax consequences. The order itself will be sent to a plan administrator, and it will instruct the administrator as to how the funds are to be dispersed.

Non-qualified plans, plans that aren’t required to adhere to ERISA, are usually reserved for high-ranking and highly paid employees. These plans are typically not assignable to a spouse and aren’t affected by a QDRO. For these plans, the spouse entitled to a portion of the plan should receive the value she is entitled to in other ways, or enter into an agreement which prescribes a transfer to take place once the employee-spouse actually receives payment from the plan (usually at retirement).

Whether your spouse’s retirement is a defined benefit or a defined contribution plan matters when it comes to calculating the value of the plan – a necessary step in equitable distribution. Because of the differences in the two plans, the plans are valued differently in terms of equitable distribution.

A defined contribution plan is designed so that the employee and/or employer make regular contributions to the plan. For example: with a 401(k), a percentage of an employee’s paycheck is deposited into the plan, and the employer matches each contribution. A defined benefit plan, on the other hand, is a type of pension plan in which an employer agrees to pay a specified monthly benefit upon retirement that is predetermined by a formula based on the employee’s earnings history, years of service, and age.

For a defined contribution plan, there is a simple math equation, known as the coverture fraction, which helps determine how much of the plan is marital. You would divide the length of time a spouse was simultaneously married and contributing to the pension plan by the total length of employment during which the pension was earned.

Finding the value of a defined benefit plan is more complex. For these plans, the amount paid at retirement is typically based on the salary of the employee’s last years of work. In situations where the salary of a spouse’s last years of work have yet to be determined, the courts will apply a five-step process to determine the value of a defined benefit plan.

The court will first determine the earliest date that the spouse can retire. Then the court will determine the life expectancy at the date of separation to determine how many months the employee-spouse will get the benefits. Next, the value of the pension at the earliest retirement date is established. Then, the value to the date of separation is discounted (figure out the future value and discount that value to the date of separation), and finally the court will determine any contingencies that may occur and discount the value further.

There are several scenarios and factors that could lead to your spouse getting more than 50 percent of your retirement plan. One reason your spouse could end up taking more than half of your retirement is if the other marital assets involved are either minimal or unavailable. For example: you and your spouse could be splitting your assets on a 50/50 basis, but if a large portion of your assets is a business interest that you aren’t willing to sell, you may opt to give a larger portion of your retirement plan to your spouse in order to adhere to a 50/50 split without involving your business interest.

If you and your spouse are able to handle your equitable distribution issues through a separation agreement, the agreement can reflect the needs of you and your spouse as you two see fit. If you desire, you can agree to keep your retirement plans intact and account for what you owe with other assets. You and your spouse can also agree to keep your retirement savings out of the equitable distribution calculation.

Deciding to keep retirement accounts out of the separation agreement is an ideal approach in situations where the retirement plans are comparable or minimal. If one spouse has a much larger retirement account, that asset will usually be incorporated into an agreement for equitable distribution.