Division of Retirement Accounts and Assets in Divorce | QDRO Litigation | ERISA Regulations
Division of Retirement Accounts and Assets in divorce is an important issue that requires careful consideration. From the date of the marriage to the date of the filing of the divorce complaint, retirement accounts and assets that accumulate during that time (including gains and losses) will be divided evenly. The trick is to decide whether a deferred payment or hiring an actuary to calculate the present value of that future retirement stream is favorable. Litigation often arises over the division of pensions, which are regulated by ERISA (Employee Retirement Income Security Act).
A transfer of a pension asset pursuant to divorce must be done in compliance with the plan, usually through a Qualified Domestic Relations Order (QDRO). The steps for preparing a QDRO are: writing to the plan administrator for a plan booklet, drafting a form of QDRO, signing the document and sending it to the judge for execution, and sending the QDRO to the plan administrator. For a 401(k) or traditional plan, the money will be immediately distributed to the non–owner spouse into their own IRA or divided into separate payments. Once divided by QDRO, the pension money cannot be taken
From the date of the marriage to the date of the filing of the divorce complaint, retirement accounts and assets that accumulate during that time (including gains and losses) will be divided evenly. The trick of these assets is to decide whether a deferred payment, which might pay a fixed amount of money per month to the non-working spouse or non-owner spouse, is favorable, versus hiring an actuary to calculate the present value of that future retirement stream and buyout one person’s interest in a future retirement asset.
Many people fight over this asset. Usually, men do not want to lose the pension. Women may not care about the pension today and prefer to trade a pension for a present and valuable asset. This philosophy may make sense for a younger woman, keeping the house for her and the children today. For an older spouse who does not participate in a pension, pension rights are extremely valuable and should be preferred.
Much litigation is borne of disputes over the division of pensions. The federal government is heavily involved in the regulation of pensions through ERISA (Employee Retirement Income Security Act). In a nutshell, ERISA dictates that pension plans must have a written plan and provide for their division. A transfer of a pension asset pursuant to divorce is not a taxable, as long as it is in compliance.
Most plans will require that the pension asset be divided pursuant to a Qualified Domestic Relations Order (QDRO). Whereas most other assets can simply be divided by agreement, pensions do not fall into that category. If your Property Settlement Agreement does not meet ERISA, your pension will not be considered to be properly divided. The great risk is that if the plan participant dies after the divorce, then the divorced, non-titled spouse gets nothing. It happens — it is painful and unfair and it can be avoided.
Retirement Accounts – QDRO
The way to avoid this horrible circumstance is to prepare a QDRO.
The steps are as follows:
After the parties identify and agree upon the division of a certain retirement asset, one will write to the plan administrator to receive a plan booklet (a description of the retirement plan). Then, a draft form of QDRO is sent to the plan administrator for review and approval. If the QDRO is approved, the lawyers and/or spouses will sign and send the QDRO to the judge. The executed QDRO will then be sent to the plan administrator.
For a 401(k) or similar plans, the money will be immediately distributed to the non-owner spouse into his or her own IRA and, for a traditional plan, the payout will be divided into separate payments direct to the non-titled spouse when the pension goes into pay status. The divided pension or 401(k) becomes two wholly separate streams of payments or retirement accounts. Once divided by QDRO, the pension money cannot be taken away from the non-participant spouse.
Fidelity Investments has an online portal to help in dividing retirement assets in divorce.
Thanks to Horn Law Group, LLC intern Noah Hilsdorf.