Dividing retirement accounts in divorce can be a prolonged process. For example, if the retirement account is derived from a government agency, a spouse may need to get more information about how the account is to be divided upon divorce. Some Plans need the retirement account to be formally “joined” in the divorce proceeding. Read on to learn more about dividing retirement accounts in divorce.
Divorce and Retirement Benefits
Retirement benefits are typically the most valued assets during a divorce. In some circumstances, a retirement benefit is worth more than a home and the combined total of other community property assets. As a result, calculating retirement benefits is a very important part of dividing the community property. Accrued or vested retirement benefits such as pensions are considered community property. Community property is divided between spouses 50/50. Dividing retirement benefits in divorce in California is based on time of service that is deemed community property up until the date of separation. In other words, 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, IRAs, Keoghs, Employee Stock Option Plans, 401k and 403 plans, defined contribution plans, and defined benefit plans. Retirement benefits such as social security payments, compensation for military injuries, and workers’ compensation disability awards are not classified as community property. The division of retirement benefits should be addressed and settled in the marital settlement agreement or final judgment.
How Are Retirement Plans Divided in Divorce?
Dividing retirement plans through divorce is a process separate and distinct from the divorce proceedings and requires other forms to be filed with the court. A Qualified Domestic Relations Order (QDRO) outlines how retirement assets are distributed to each party in divorce. The QDRO is not filed until a divorce Judgment has been entered which describes how the retirement plan is to be divided.
As mentioned above, community property interest in retirement plans are typically divided 50/50 between the spouses. The parties can, however, agree to something completely different, such as awarding a specific dollar amount or different division percentage between themselves. A QDRO is required to reflect the division of the couple’s retirement plan, consistent with what has been stated in the marital settlement agreement. Although the martial settlement agreement and Judgment may describe how the Plan is to be divided, the QDRO is the official court order and directive to the Plan Administrator as to the division of benefits. A QDRO is needed 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. A QDRO specialist can be helpful when the community property estate is substantial and there is a dispute as to the true value of the community property interest in the retirement. QDRO specialists use a very complex formula that values the plan and determines the amount to be awarded to the Alternate Payee. 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.
Additionally, there are certain retirement benefits that may have other options for segregating funds between the parties, and not have the Plan be divided by 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 (pursuant to his/her share). Pension actuaries are usually hired to calculate the present value of the Plan.
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. It is a ratio that takes into consideration the time worked between the date the spouses are married and the date they separated in relationship 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, where the amount of retirement benefits is directly related to the number of years of services; but has also been used to divide stock and other similar assets. If the accrued retirement benefits are related to another factor, a different formula to calculate the division of retirement benefits may be needed.
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.
A simple example of this is as follows: If a couple was married for 8 years during which time one spouse worked for the same employer and accrued retirement benefits, but then retired after 20 total years of service with said employer, the community property interest in the retirement benefits would be 8/20 or 40%. The remaining interest would be the separate property of the employee. 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 and they are similar in value, they can agree to keep their own retirement accounts instead of dividing the amount of each in half. Sometimes one party can be awarded a larger share of an equally valuable community asset, such as real property. If the parties waive rights to their spouse’s retirement, then a QDRO is not necessary. A copy of the Judgment can be sent to the Plan Administrator showing that their spouse waived community property interest in the retirement.
Another option would be for the spouses to wait to divide benefits when they become due instead of during the divorce proceedings. This is not the best option as it could be problematic should one of the parties unexpectedly die before the benefits have been formally divided. It also exposes the retirement account to be unexpectedly depleted by the spouse who holds the retirement account before it has been properly segregated.
A third option that avoids formal retirement division is when a 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 requirement 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. Plans that typically require Joinder are City or County governmental retirement accounts.
All Plans, however, do need a QDRO to process the division of the retirement account with the Plan Administrator. Once the QDRO has been 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.
The following forms can be used to formally join a retirement Plan in divorce proceedings and to obtain the official court order necessary for the retirement Plan Administrator 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 their own requirements regarding how they want the QDRO drafted. 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 a Joinder process is not required by the Plan. 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. The Joinder process formally puts the Plan on notice of the divorce proceedings, and lets the Plan Administrator know that there may be a community property claim against those benefits. 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. If a spouse is concerned about the other party diminishing the value of the retirement account through any of these actions, it would be recommended to formally “join” the Plan through a Joinder process even though it may not be required.
Contact A People’s Choice for help on 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 as well as prepare the forms needed to divide them consistent with your divorce Judgment. Call us at 800-747-2780 for immediate assistance!