Dividing retirement accounts in divorce can be a complicated, prolonged process. For example, a retirement account derived from a government agency requires separate attention and processes when divided between spouses. Additionally, some plans require the retirement account to be formally “joined” in the divorce proceeding. If you’re in the process of dividing your retirement assets in a California divorce, read on for more information.
Divorce and Retirement Benefits
Typically, retirement benefits are the most valued assets during a divorce. In fact, sometimes a retirement benefit is worth more than a home! As a result, calculating retirement benefits is a very important part of dividing community property.
Community property includes accrued or vested retirement benefits such as pensions. Spouses share such community property 50/50 in a divorce. Additionally, the community property interest is based on the accrued benefits in the plan from the date of marriage to the date of separation.
Common retirement benefits subject to community property division include:
- military pensions;
- veteran’s educational benefits;
- ERISA funds;
- employee stock option plans;
- 401k and 403 plans;
- defined contribution plans;
- and defined benefit plans.
However, retirement benefits such as social security payments, compensation for military injuries, and workers’ compensation disability awards are not classified as community property.
Note that parties should address and settle the division of retirement benefits in the marital settlement agreement or final judgment.
How Are Retirement Plans Divided in Divorce?
Using a QDRO
Dividing retirement plans through divorce is separate from the divorce proceedings. Therefore, it requires filing other forms with the court. Specifically, a Qualified Domestic Relations Order (QDRO) outlines how retirement assets are distributed to each party in divorce. However, spouses do not file a QDRO until a divorce judgment outlines the division of the retirement plan.
While community property interest in retirement plans are typically divided 50/50 between spouses, the parties can agree to something completely different. For example, some couples may award a specific dollar amount or choose a different division percentage. Regardless, couples must file a QDRO to reflect the division of the retirement plan, consistent with what they stated in the marital settlement agreement. Although the marital settlement agreement and judgment may describe how the plan will be divided, the QDRO is the official court order and directive to the plan administrator concerning the division of benefits.
Note, the courts require a QDRO to divide the following types of retirement benefits:
- 401k and 403b
- Thrifty savings plans
- Profit-sharing plans
- Employee stock ownership plans
- Tax sheltered annuities
Typically, attorneys refer to a QDRO specialist to formally value and/or prepare the QDRO. In fact, a QDRO specialist is especially helpful when the community property estate is substantial and there is a dispute of the true value of the community property interest in the retirement. Additionally, QDRO specialists use a very complex formula that values the plan and determines the amount to award to the alternate payee.
However, QDRO specialists are usually very expensive and are typically not needed to formally divide most plans. Today, most plans are set up to provide detailed information that makes it easier for non-attorney services to prepare the required QDRO paperwork.
Other Ways to Divide Funds
Additionally, there are certain retirement benefits that spouses may divide without using QDRO calculations. For example, a couple can distribute a defined contribution plan according to its “buy out” guidelines. Under this option, the spouse without the retirement plan could receive a present value cash out of the plan in its entirety. Usually, couples will hire pension actuaries to calculate the present value of the plan.
Finally, another way to divide a retirement plan is to provide the non-employee spouse with a percentage of their former spouse’s monthly pension check. This percentage is calculated by dividing the total number of years the spouses were together by the combined total of years the spouse participated in the pension plan. Upon retirement, each spouse will receive a payment based upon their interest.
How is the Retirement Division Calculated?
The time-rule method of dividing California retirement benefits has become the standard formula used to segregate community and separate property interests in retirement benefits. Specifically, the time-rule method is a ratio that compares the time worked between the date of marriage and the date of separation to the entire time the plan holder was employed.
The time-rule is most often used to divide a defined benefit plan such as a pension, in which the amount of retirement benefits is directly related to the number of years of service. However, couples also use this method to divide stock and other similar assets. That being said, spouses may require a different formula if the accrued retirement benefits are related to another factor.
When the Time Rule formula is utilized, the calculation of the community property interest in an individual retirement plan is determined by a fraction whose numerator is the employee’s length of service from the date of marriage through the date of separation, and the denominator is the employee’s total length of service at retirement. Source
In a simple example of the time-rule method, say a couple was married for eight years. During this time, one spouse worked for the same employer and accrued retirement benefits over 20 years before retiring. In such situation, the community property interest in the retirement benefits would be 8/20 or 40%. Then, the remaining interest would be the separate property of the employee. Finally, since the community interest is divided equally between the parties, the non-employee spouse would receive 20% of the total retirement benefits, and the employee spouse would receive 80% of the total retirement benefits.
Alternatives to Dividing Retirement Plans in Divorce
As an alternative to formally dividing retirement plans in a divorce, spouses can take their own retirement contribution and waive any community property rights to their spouse’s retirement. For example, if each spouse owns a 401K account through their employer, they can agree to keep their own accounts instead of dividing each in half. Sometimes, one party receives a larger share of an equally valuable community asset, such as real property.
Furthermore, if one party waives their rights to a spouse’s retirement, then a QDRO is not necessary. Instead, they can send a copy of the judgment to the plan administrator demonstrating the waived community property interest in the retirement.
Additionally, the spouses could wait to divide benefits until they become due instead of during the divorce proceedings. However, this method could be problematic should one of the parties unexpectedly die before the formal division of benefits. Plus, this method also provides the opportunity for one spouse to deplete the retirement account before proper division.
Finally, spouses can avoid formal retirement division when one’s will designates their children as the beneficiary of their retirement accounts. Again, this option could be problematic if a party changes their will, obtains a loan against their plan, or otherwise depletes the monies in the plan prior to their death.
Forms Required to Divide Retirement Benefits in Divorce
Not all retirement accounts require formal joinder to the divorce proceedings. Refer to the Retirement Plan Joinder-Information Sheet below for a brief explanation of the types of plans that require formal joinder. Typically, city or county governmental retirement accounts require joinder.
However, that being said, all plans do need a QDRO to process the division of the retirement account with the plan administrator. Once the QDRO is processed, the plan administrator will set up a new, separate account for the non-employee spouse. A division of retirement benefits by QDRO in a divorce is not considered an early, taxable withdrawal, and is free from tax penalties.
You can use the following forms to formally join a retirement plan in divorce proceedings and to obtain the official court order necessary to divide retirement benefits in a California divorce:
- Request for Joinder of Employee Benefit Plan and Order (Judicial Council Form FL-372)
- Pleading on Joinder—Employee Benefit Plan (Judicial Council Form FL-370)
- Summons (Joinder) (Judicial Council Form FL-375)
- Notice of Appearance and Response of Employee Benefit Plan (Judicial Council Form FL-374)
- Retirement Plan Joinder—Information Sheet (Judicial Council Form FL-318-INFO)
- Info for Service of Process of Plan
- Notice and Acknowledgment of Receipt (Judicial Council form POS 015)
- Qualified Domestic Relations Order. There is not a “one-form-fits-all” for the actual QDRO. Each retirement plan has its own requirements for drafting the QDRO. Each Qualified Domestic Relations Order must be custom-prepared based on each plan’s QDRO
Benefits of Formally Joining Retirement Plan
There may be times when a party may want to formally join a pension or retirement account even if the plan doesn’t require a joinder process. When a retirement plan is formally joined in a divorce proceeding, the process effectively “locks” the plan until the retirement account has been divided between the parties. Additionally, the joinder process formally puts the plan on notice of the divorce proceedings. It also lets the plan administrator know there may be a community property claim against those benefits. Finally, joining the plan also prevents a party from obtaining a loan against those benefits, withdrawing part of the cash value, or cashing out the value of the plan.
Therefore, if a spouse is concerned about the other party diminishing the value of the retirement account, they should formally join the plan through a joinder process.
A People’s Choice Can Help You Divide Your Retirement Assets
Contact A People’s Choice for help dividing your retirement accounts in divorce. We can contact the plan administrator to obtain the necessary information to formally join the plan in your divorce. Plus, we can prepare the forms needed to divide them consistent with your divorce judgment. Call us at 800-747-2780 for immediate assistance!
Hi can I receive money from my ex wife’s 401k if it was not in the final judgement?
You woul have to modify your Judgmenr.
Hello, I was awarded a disability pension from CalSTRS prior to getting married. I have not gone back to work since being married. Does that require a joinder? To be clear, is my spouse entitled to my disability pension after divorce?
Hello Sheana, CalSTRS does usually require a joinder if a QDRO is deemed necessary. Unfortunately, we cannot advise what your spouse is legally entitled to. I would consult with an attorney regarding that issue.
Would you be able to calculate the value of my pension as of today? If you can please contact me
Unfortunately we do not do that but I know there are companies that do; however it is quite expensive.