What do you think is the most valuable asset a married couple needs to divide in a divorce? The marital home? A joint bank account? Perhaps. But for many people, the most valuable marital asset subject to division in divorce is an employer-provided retirement account. Unfortunately, that is also one of the most complicated assets to divide.
Dividing a retirement account is complicated for a number of reasons. First, it will almost certainly fluctuate in value, and is all but impossible to predict what the value of the account will be when funds are ultimately withdrawn. Second, retirement accounts are often partly separate and partly marital property: the employee may have opened the account before marriage, and continued contributing to it afterward. As a result, only some of the funds or assets in the account are subject to division in a divorce.
The third reason retirement accounts are difficult to divide is that they are governed by complex federal law: the Employee Retirement Income Security Act of 1974, better known as ERISA. In order to divide an account that is covered by ERISA, more is needed than just a provision in the divorce decree saying that the account should be divided. The divorcing couple must have a Qualified Domestic Relations Order, or QDRO (pronounced “quad-ro”).
Not all retirement accounts are subject to ERISA, only those provided by your employer. Your Roth IRA, for example, is not an employer-provided benefit. Employer-provided retirement plans fall into two categories: defined-benefit plans, like pensions, and defined-contribution plans, like 401(k)s. Employee stock ownership plans (ESOPs), 403(b)s, and profit-sharing plans are other examples of defined-contribution plans.
If you, or your spouse, have an employer-provided retirement account, what do you do about splitting it as part of the asset division in your divorce? How do you even figure out how much is subject to division? And then, most critically, how do you carry out that division in a way that complies with federal law and divide the assets in reality, not just on paper?
The first thing you need to do is make your divorce attorney aware of all retirement accounts, both those in your name and those in your spouse’s name. It may seem like the simplest option to say that each of you will keep your own accounts. While that is certainly a possibility, and eliminates the challenges of valuing and dividing accounts, it often means that one party gets shortchanged. It is generally wiser to work with an attorney who is familiar with the complexities of dividing retirement accounts, and make sure you receive the assets to which you are entitled.
QDROs are more complicated than ordinary court orders, because they involve the plan administrator of a given retirement plan, and plan administrators have specific language requirements for QDROs. Typically, the QDRO process unfolds like this: the divorce court will order that the divorcing spouses divide ERISA-governed retirement accounts using a QDRO. One of the divorce attorneys will contact the plan administrator for the retirement plan and request sample QDRO language, which she will use to prepare the QDRO. The parties and their attorneys will review the draft QDRO to make sure its terms and language are consistent with the divorce decree and any agreements they have made. Then the draft QDRO will be sent on to the plan administrator for a review. Once the plan administrator has given preliminary approval, the QDRO is returned to the parties for their signature and then presented to the court for the judge’s signature. The QDRO is then filed with the court.
The attorney or QDRO preparer orders a certified copy of the QDRO for the plan administrator. The plan administrator reviews and implements the QDRO, dividing the asset. Some plan administrators may have a period of time during which comments or appeals can be filed.
As you can see, this is a multi-step process. Some of the steps can take weeks, and if anyone responsible drops the ball, it can take much longer. In the end, if everything is done properly, the assets in one spouse’s account are divided, and the other spouse will receive their fair share of the accumulated assets.
If you have further questions about the QDRO process, or need to have a QDRO prepared as part of your divorce settlement, please contact our law office to schedule a consultation.