Dividing Retirement Funds in Divorce
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 and experienced divorce attorney.
Read more about dividing assets or dividing real estate in a divorce.