The biggest assets most people have are their home and their retirement plans. So, it is no surprise that dividing these assets when a couple divorces is tough. While dividing a couple’s interest in their home and in their retirement plans can both be complicated, it is especially tricky to divide your retirement plan in divorce.
Today, I tapped the expertise of Veronica Silva, an attorney who specializes in drafting the Qualified Domestic Relations Orders known as QDROs which are used to divide retirement accounts in divorce. Here is what she has to say.
Dividing the Most Valuable Asset in Divorce: Your Retirement Accounts
By Veronica Silva
Most divorcing couples participate in a private employer or government employer sponsored retirement plan such as a pension, 401(k), 403(b), profit sharing, FERS, TSP, teachers’ pensions, and police or firefighter pensions. The retirement benefits provided by these plans are protected against claims from creditors and can only be paid to the employee who earned them or to their spouse or a dependent after the employee’s death, or to the former spouse following a divorce.
Just as bank accounts, the family home, cars, a boat, furniture, and other items are divided between a couple that is divorcing, so, too are retirement, pensions, and accounts earned during the marriage subject to division in divorce. If they were earned during the marriage, they are considered to be marital assets.
You Don’t Want to Make a Mistake With Your Biggest Asset
Usually, retirement accounts and pensions are the most valuable assets which a couple has to split in a divorce. Yet they are usually misunderstood, mishandled or disregarded. As a result, one person can either end up getting a lot less in his/her share of the retirement accounts than expected, or s/he can have to pay taxes and penalties unnecessarily.
In most divorces, the husband holds the bigger retirement account. This puts the wife at a great disadvantage. Wives often stayed home to raise the children, which means they stopped contributing to their own retirement benefits during their childbearing years. When the parties divorce, the wives typically have significantly less money put away for their retirement.
As part of the divorce settlement, the husband often agrees to transfer a portion of the money in his retirement account to the wife. What many people don’t understand, though, is that a special court order, usually called a Qualified Domestic Relations Order (QDRO) has to be entered in court before the retirement money will actually be transferred. The divorce judgment alone is not enough to make the transfer happen.
The court orders that are used to divide your retirement plan in divorce are exceptionally complex. Each order has to be specially drafted so that it complies with the terms of the particular retirement plan that one spouse participates in. As a matter of fact, these orders are so complicated that many divorce attorneys send them to specialists to draft.
You Need a QDRO to Divide Your Retirement Plan in Divorce
Only a QDRO or similar court order can divide retirement benefits in a divorce. Without such an order, a spouse cannot receive any portion of his or her former spouse’s retirement benefits.
The following are the most important points every spouse should know about QDROs and similar court orders.
1. Preparing or reviewing QDROs in a divorce has to do more with retirement plan law than family law. Therefore, having your divorce lawyer prepare such orders may not always be your best option.
2. Retirement plan laws and regulations are highly complex and technical as they involve tax and trust issues. This is the main reason why responsible divorce attorneys will not prepare these documents themselves, but instead will refer their clients to a QDRO attorney or a retirement plan lawyer to prepare the QDRO or similar court order.
3. No matter who prepares the QDROs, both spouses should have their own QDRO attorney review the documents, to make sure they are done properly. Each spouse will also want to make sure that the QDRO gives him/her the exact benefits that they parties contemplated in their divorce settlement.
4. Hiring a QDRO attorney in addition to a divorce attorney does not necessarily mean you will pay more. QDRO attorneys usually charge a flat fee to prepare a QDRO. Divorce attorneys charge by the hour to perform the same service. Usually, hiring a QDRO attorney saves you money.
5. Since federal law regulates most of the retirement plans to which a QDRO or similar court orders apply, you can hire a QDRO attorney who is not located in your specific geographical area. A QDRO attorney can write or review QDROs for anybody, anywhere in the country.
6. QDROs and other similar court orders are not just simple form to be completed. They are not neutral documents. They can be written in a way that is more favorable to one spouse over the other, even if each of them is supposed to receive “half” or “50%” of the retirement benefits.
7. Each party is at risk of losing a lot of money if the QDRO is not properly written. Loans, pre-divorce withdrawals, survivor benefits, all could be in jeopardy when inexperienced individuals mishandle a QDRO or similar court order.
8. QDROs need to be written specifically for the parties, and tailored to their circumstances (age, work history, length of marriage, etc.). Little words make a big difference in the world of QDROs. Divorcing couples should be careful about using a “model QDRO” provided by the plan itself or the cookie-cutter do-it-yourself QDRO offered online by some companies. These cookie-cutter QDROs cannot be properly tailored and can end up costing you money in the long run.
9. If possible QDROs should be prepared before your divorce is final. The best practice is to get the QDRO prepared and negotiated while the divorce process is ongoing. The more you delay having a QDRO prepared and approved the bigger the risk that something will happen before the QDRO is entered. For example, if the husband dies before the QDRO is entered, the wife may find herself out of luck when it comes to getting the retirement money she anticipated.
10. Before a QDRO can be entered, the retirement plan administrator must approve it. Doing that takes time. This is another reason why preparing QDROs during your divorce, instead of waiting until after your divorce is over, is much wiser. (NOTE: The plan administrator’s approval of a QDRO only means that the QDRO meets a few basic legal requirements. It does not mean that the QDRO actually divides the spouses’ interests in the manner in which the parties anticipated.)
What’s the takeaway? QDROs and similar court orders are complicated legal documents. If you need such an order to divide your retirement plan in divorce, the best thing you can do is hire a QDRO attorney to make sure your orders are done right.
About the author: Veronica Silva is a QDRO attorney licensed in Illinois helping divorcing couples and their divorce attorneys properly divide retirement pensions and accounts during and after a divorce. Ms. Silva has more than 10 years of experience dealing with the compliance and daily operation of retirement plans. This unique legal background and experience distinguishes her from most other QDRO professionals. The wisdom and insights she has gained working for over a decade in the retirement plans legal field allows her to provide high quality advice and work product to her clients.