Special Concerns When Dividing Retirement Plan Assets in a Divorce

1) The Documents:

a) The Property Settlement Agreement: A marital estate consists of property. Typically, that property will include, but not be limited to, a residence; a vehicle; house furnishings; jewelry; savings accounts; and one or more retirement plans. When the parties, with the help of their advisors, decide how the marital property will be shared, that agreement will be written into a Property Settlement Agreement (PSA).
b) The Domestic Relations Order: The benefits/accounts in retirement plans (401(k), profit-sharing, and pension plans) are held in Trust for the plan participant and his/her post death beneficiaries. However, one exception to that rule is that a properly drafted Order (known as a Domestic Relations Order [DRO]), after it becomes a Qualified Domestic Relations Order (QDRO) when the terms of the Order are approved by the Plan Administrator and entered in the Court, will direct the Plan Administrator how and when to divide the plan’s benefits/accounts between the parties per their agreement set forth in the PSA.

2) Timing of the Creation of the QDRO:

It is not unusual to find that the last piece of marital property to be discussed is the division of retirement plan assets. Therefore, the health of the participant spouse could become an issue in the division deliberations. Although there is case law that supports the creation of a QDRO after the death of a participant spouse, it might be wise to consider addressing the QDRO early on in the marital property division deliberations.

3) Pre-Nuptial Agreements:

The laws and the regulations promulgated by Congress and the Departments of Labor and Treasury set forth the rules of operation for tax favored retirement plans. One of those rules stipulates that a participant’s spouse cannot lose his/her survivorship rights in connection with benefits/accounts in a tax favored retirement plan. Therefore, while a pre-nup could control living benefits/accounts in a retirement plan, the same is not true for the survivorship benefits/accounts.

4) Same Gender Marriages:

Note well that the act of marriage between 2 men or 2 women may eventually be exposed to divorce. This means that all of the deliberations needed to divide marital property in heterosexual marriages will be applicable to same gender marriages.

A guide to all aspects of dividing retirement plan assets in a divorce will be helpful to the parties and their advisors.