You and your spouse may have participated in a retirement plan during your marriage. Retirement plans include but are not limited to defined benefit plans such as pensions and defined contribution plans such as 401(k)s and Individual Retirement Accounts. Unlike a house or shares of stock, both of which can be readily valued and liquidated, a defined benefit plan represents a future benefit of undetermined worth. For divorce purposes, it’s necessary to value your retirement accounts and determine the community property share. For that, you will need a document that sets forth the terms for the division of qualified retirement plans between divorcing spouses, such as a Qualified Domestic Relations Order (QDRO).
According to Investopedia, a QDRO directs a plan administrator to divide a pension benefit between divorcing spouses. A QDRO is necessary to divide all 401(k)s, 403(b)s, and ERISA-covered pension plans. Similar orders are required to divide state-based pension plans, such as CalPERS and CalSTRS. An attorney must be well-versed in the tax consequences of pension division and the requirements for properly preparing a QDRO, as not all attorneys are qualified.
According to the Pension Rights Center, federal law protects retirement benefits, which is why they can only be divided between former spouses if there is a QDRO. In this case, a divorce decree issued by a court may not be enough, even if it states that the retirement benefit should be divided. In order to divide a defined benefit plan the plan will require a QDRO that is a separate document from the divorce decree.
Most retirement plan administrators have specific requirements when filing QDROs. The plan administrator will follow certain established procedures to approve or reject a proposed QDRO and administer distributions to both spouses to the terms of an approved QDRO. An attorney with considerable experience in the preparation of QDROs can assist in drafting it to ensure it meets the needs of the plan. Once the document meets the requirements of the plan administrator and has received court approval, the plan administrator will take the necessary steps to transfer the portion of the retirement accounts or monthly benefit which are being divided. Withdrawing funds from a defined contribution plan instead of investing them in a retirement account will likely mean paying a tax penalty. Understanding the possible tax implications of any withdrawals from funds received under the QDRO is essential.
A QDRO might not be necessary for all retirement plans. If you have an Individual Retirement Plan, or a deferred annuity, a QDRO may not be necessary. If your spouse works for the state or federal government, including the military, you will need to obtain a different type of court order that essentially has the same effect as a QDRO.
Due to the value of the property involved in retirement accounts, spouses need to be fully aware of the retirement accounts and their possible right to receive a portion of this asset when going through the divorce process. Schoenberg Family Law Group, P.C., understands the nuances of QDROs and other aspects of retirement portfolio division. Our attorneys have handled high-asset and complex divorces throughout the Bay Area. They are well-versed in preparing QDROs and ensuring that our clients receive their entitled benefits and distributions years after the divorce.
Written by Debra Schoenberg