Divorces can be messy. The process can be challenging for couples to navigate, even when most issues can be resolved amicably. This is one reason why couples often turn to an experienced family law attorney to help them draw up agreements, resolve unsettled issues, and review the issues which a couple has resolved between them.
One type of asset which is challenging to navigate during the property division phase of a divorce is retirement accounts. One partner or both may have these types of accounts, and in some cases, some of these assets were in the account prior to the marriage. Since California is a community property state, the state holds the belief that any assets accumulated during the marriage are to be divided evenly between the two parties. In the event one or both spouses have retirement accounts to be divided, a qualified domestic relations order (QDRO) is required.
What is a QDRO?
Qualified domestic relations orders are used to divide assets in specific retirement plans. There are some plans, such as individual retirement accounts (IRA), deferred annuities, and some government pension plans which do not require these types of court orders.
QDROs provide specific directions to the custodian of the accounts on what amount is to be sent to the receiving spouse, as well as information on how they are to be transmitted. These orders are used for the following types of accounts:
- Corporate Profit-Sharing and Stock Ownership Plans
- Corporate and Business Defined Pension Plans (DPP)
- Money Purchase Plans
- Plans falling under section 403(b), 401(k) and 457 of Employee Retirement Income Security Act (ERISA)
Some of these plans are more complicated to divide up than others — for example, DPPs are more challenging to value than others. However, when you are working with an attorney, they can help you navigate this process and make sure the court has complete information on each of these retirement plans.
Is a QDRO the Only Way to Divide Retirement Assets?
In a word — no. You do have other options to deal with assets which your spouse is entitled to following your divorce. One option is to offer to provide non-retirement assets to your spouse in the amount of their interest in the retirement plan. This is commonly called a buy-out. To complete the buy-out however, you will have to reach an agreement with your spouse regarding the value of your plans, and the court will have to approve the agreement and include the terms of the agreement in your Dissolution Judgment.
Anyone who is going through the divorce process and has certain retirement accounts should also determine ahead of time whether the receiving spouse may need to join the plan in order to receive any portion of that plan. Your family law attorney can help you understand the differences and which accounts may require the spouse to join the plan.
How is The Amount of the Retirement Account My Spouse is Entitled to Established?
Typically, the assets of a couple are divided equally in California. When there are retirement accounts, there are complicated formulas which must be taken into consideration. For example, any funds which were part of your plan prior to your marriage are considered sole property. For most plans, the value of the plan on a specific date is used to determine how much your spouse is entitled to as part of the divorce. Other plans, such as defined benefit plans and annuities are more complicated. That is because they are based on a specific value, versus a specific investment amount to arrive at a value. Speak with your attorney about finding out how these plans are to be used.
What Steps are Taken After a QDRO is Issued?
The first thing you must understand is most retirement plan administrators have certain requirements for QDROs. Your attorney can help draft the QDRO to ensure it meets the needs of the plan. Once there is certainty the document meets the needs of the plan administrator, the court will have to approve the document and give their approval to the plan which has been agreed upon for the division of retirement assets.
Once the court approval has been received, the plan administrator is provided with the court-certified copy of the QDRO. The plan administrator will then take the necessary steps to transfer the portion of the retirement accounts which are being divided. Keep in mind, withdrawing these funds rather than leaving them invested in a retirement account will likely mean paying a tax penalty so it is important you understand the tax implications of any withdrawals from funds received under the QDRO.
How Would a Buyout Work Versus a QDRO?
If you and your spouse agree to use the buy-out option, the process is different. First, the funds would not be drawn from your retirement plan, instead they would be from other assets. For example, if you had an art collection which was estimated to be valued at $100,000 and your spouse is entitled to half, that is an easy calculation. If the determination is made they would be entitled to $50,000 in assets from your retirement plan, you could agree to turn over the entire art collection to your spouse. Keep in mind, the buy-out still must be approved by both your spouse and by the court.
Property division is complicated when both spouses have both property they own together as well as property which is considered their sole property. It is further complicated with both partners having retirement plans which must be divided upon their divorce. Everyone who is working through the complicated process of a divorce should be working with an attorney whom they feel comfortable with and one who understands the complexities involved in resolving issues surrounding QDROs and pension benefits.
If you need assistance resolving any aspect of your marriage dissolution or drafting a QDRO to divide retirement assets, contact Attorney Bishop to schedule a consultation. Call our office at (619) 724-4148 or complete our online Contact Form.