Retirement assets are often the most substantial part of the community’s property. Most qualified retirement plans can be divided between divorcing parties by Qualified Domestic Relations Order (“QDRO.”)
A) Defined Contribution Plan
The most common example of a defined contribution plan is a 401(k) plan. In a defined contribution plan, the employee can make pre-tax contributions into an account maintained in his or her own name. The employer can also make contributions of a fixed percentage of the employee’s salary into the account. In a defined contribution plan, there is no guarantee as to how much money will be in the account when the employee retires. That depends on the performance of the investments in the account over time. The only thing that is guaranteed, or “defined,” is the amount that the employer contributes periodically to the employee’s account.
B) Defined Benefit Plan
By contrast, in a defined benefit plan, there is no specific account maintained separately for a particular employee; there is a trust fund for all employees who participate in the plan. As employees accumulate years of service to an employer, they accumulate credit toward their retirement benefits. A traditional pension plan is the most common type of defined benefit plan. The amount of benefit that they will receive is defined (unlike in a defined contribution plan.)
C) Corporate Plans
Not all retirement plans are divisible by QDRO, or any other method. There are a lot of retirement assets out there which are “non-qualified;” they are not subject to ERISA. Non-qualified plans usually have terms in their names such as: “Supplemental,” “SERP,” “Non-qualified,” and “Excess Benefit.” A number of non-qualified retirement plans will accept a Domestic Relations Order (a “DRO,” not a “QDRO”) which provides for payments to be made directly to a former spouse, just as a qualified plan would.
D. Government Plans
Retirement plans for many government employees are exempt from ERISA. The federal government’s three main retirement plans (the Thrift Savings Plan, Federal Employees Retirement System (“FERS”), and Civil Service Retirement System (“CSRS”) are divisible, but not by a “QDRO.” These plans have their own mechanisms for division, which include specialized terminology. Publications and guidelines are available at www.tsp.gov for the Thrift Savings Plan and at www.opm.gov for the FERS and CSRS.
The Thrift Savings Plan is similar to a 401(k) plan and relatively easy to divide. However, the FERS and CSRS are very complex plans with several unique qualities. State and local government retirement systems are specifically exempt under ERISA.
Contrary to popular belief, you do not need a QDRO to divide an Individual Retirement Account (IRA). IRAs are not subject to ERISA. There is a provision for the tax-free transfer of IRA funds between spouses in connection with a divorce. A transfer may be made to a spouse or former spouse under this section if it is pursuant to a Decree of Dissolution. This is known as a “trustee-to- trustee transfer,” and it should not result in tax consequences to either party, if it is clear that the transfer is incident to a divorce.
For additional information regarding pension appraisals and QDRO/DRO preparation, please visit Troyan Pension Evaluators.