In a divorce, retirement funds, retirement plans, mutual funds and benefits
are commonly a family's largest assets and often become a hot topic
of contention. Any portion of a retirement fund earned during marriage
will generally be considered marital property, which may be divided during
a divorce. In Washington state, retirement funds earned during marriage
are considered the community property of both spouses.
The Qualified Domestic Relations Order (QDRO)
To determine the division of retirement benefits during a divorce, a Qualified
Domestic Relations Order (QDRO) must be entered with the court. This allows
the transfer of funds from a participant to a non-participant (e.g., the
spouse) for plans qualified under Internal Revenue Service (IRS) regulations
and the Employee Retirement Income Security Act (ERISA). Retirement plans
provided by the military, or state and federal governments are transferred
by other special court orders such as a Court Order Acceptable for Processing (COAP).
Spouses cannot simply agree to divide qualified retirement plans without
court approval via a QDRO; it is a very detailed order which must be approved
by the retirement plan administrator. Some plans will allow you to send
a draft QDRO to the administrator for pre-approval before it is presented
to the court. In other instances, administrators will not pre-approve
a QDRO, requiring that you enter the order with the court before sending
it to the plan administrator for approval. Your divorce attorney will
be able to navigate this complicated process.
Types of Retirement Plans
The two most common types of retirement plans are:
- Defined benefit plans
- Defined contribution plans
A defined benefit plan will provide a monthly benefit amount typically
determined by the length of employment and a set or calculated multiplier.
A defined contribution plan will include contributions to an investment
account made by both employee and employer over several years of employment.
Other retirement accounts such as stock ownership plans, 401(k) plans
and 403(b) plans are commonly used defined contribution plans and require
a QDRO for distribution to a non-participant.
Awarding Retirement Funds in a Divorce
A spouse who receives an award of retirement funds pursuant to a QDRO can
only receive those funds according to the rules of the retirement plan.
For example, if the participant spouse may only collect his or her retirement
funds at normal retirement age, the non-participant will also receive
his or her award at that time. Retirement funds, subject to a plan's
rules, may be awarded by an immediate lump sum payment, monthly payments
to begin immediately or upon a certain future date, or a combination thereof.
Your attorney will be invaluable in making sure your interests are protected
in what can be a complicated negotiation process. It is important that
you have a certified public accountant:
- Calculate the separate and community property portions of the plan,
- Present value of the retirement plan benefits, or
- Reduce the future expected benefits to present value for distribution and
negotiation purposes according to your particular needs.
Documents such as the benefit statement, plan summary and agreement may
uncover hidden benefits including life insurance and disability provisions.
The issues surrounding negotiation and distribution of retirement plans
can be complicated. That's why it's of vital importance to get
it done right the first time. The cost and difficulty of fixing a mistake
years after a divorce can be avoided with the advice of a knowledgeable
Read more about
dividing assets or dividing real estate in a divorce.