How are Retirement Funds Divided in a Divorce?  Qualified Domestic Relations Orders (QDROs)

There are many issues to be resolved in dividing property and income sources in a divorce.  The division of some assets – particularly business assets and retirement assets – can be among the most complicated.

Because distributions from a retirement account may not begin for decades, retirement account benefits may not immediately come to mind as a crucial issue to be resolved during a divorce.  However, retirement account benefit division may be critical to your long-term security because these benefits  may actually have more value than any other marital asset.  This page explains some of the important considerations for retirement account division and discusses how retirement account assets and rights may be divided in a divorce.

What Rights Do Spouses Have in the Retirements Accounts of Each Other in Colorado?

In Colorado, spouses generally have a right to a share of each other’s retirement accounts to the extent that contributions were made, benefits accrued, or previous contributions increased during the marriage.  As noted below, the calculation of the amount and division of retirement assets can be complex.  The failure to obtain a Qualified Domestic Relations Order (a “QDRO”), can also jeopardize benefit receipts.  Thus, retaining an experienced divorce lawyer should always be considered when retirement benefits need to be divided. 

Understanding the Different Types of Retirement Plans and Funding

Retirement accounts, and the associated funding, include:

  • Defined Benefit Plans. These are the typically pension plans.  A company or governmental plan specifies that a worker is to receive a certain benefit (pension payments) based upon factors such as the worker’s ending salary and the number of years of employment.
  • Defined Contribution Plans. These include the popular 401(k) benefit plans.  Under these plans, employers can make certain contributions to an account for the employee pursuant to the plan.  Employees may also make contributions. Account contributions are then usually invested, and the employee is entitled to the account proceeds upon retirement (or when they leave the company, subject to tax considerations if funds are withdrawn prematurely, as well as “vesting” considerations).
  • Self-Funded Plans. These retirement accounts are funded by the account owners, and include plans such as Roth IRA Plans and SEP Plans (as well as other types of retirement accounts that may be established by business owners).  The account owners are then entitled to the retirement proceeds in the account upon retirement and subject to various tax laws.

Valuing Retirement Plans in Divorce

The value of Defined Contribution and Self-Funded Plans will always be known at any time.  To determine the account value, all that needs to be done is to check the account statements.  The value of the account will fluctuate over time, as additional contributions are made, and as the investments in the account increase or decrease.

The value of a Defined Benefit plan, however, is more difficult to determine at any given point, other than at retirement, as the pension benefit will not be known until the employee retires.  For example, if the employee continues working until retirement, the value will continue to increase, while if the employee leaves before retirement, the ultimate value of the pension may be considerably less.

What is a QDRO?

A QDRO (or Qualified Domestic Relations Order) is a judicial (court) order that is accepted by the retirement plan concerning the division of retirement account assets.  QDROs are required by a federal law created in 1984 and are mandatory for the division and distribution of assets from most non-governmental retirement plans.[1]

The Use of QDROs

QDROs focus on both spouses – the spouse who participates in the plan (referred to as the “participant”), and the non-participating spouse.  Under law, each spouse has a marital interest in the retirement plan of the other spouse.  This is the case even if only one spouse participates in a retirement plan.

Obtaining a QDRO

Obtaining a QDRO can be complicated. The first step is to reach an agreement concerning the terms of the QDRO and then have it approved by the appropriate Colorado domestic relations court. Next, the QDRO must be reviewed and approved by the administrator of the participant’s retirement plan to ensure that the QDRO complies with the plan’s internal rules, as well as the requirements of the Employee Retirement Income Security Act, or ERISA.

When are QDRO’s Required?

QDRO’s are required for virtually all non-governmental employer-sponsored retirement plans. QDROs are required for 401(k) plans; however, they are not required for Individual Retirement Accounts (IRAs), including Simplified Employee Pension (SEP) IRAs, which may be part of the marital assets where one or both spouses are self-employed or small business owners. They are also not required for pension plans of state, county, federal, and other municipal employers, such as Colorado State and local municipal employers.

IRAs may be included in a QDRO if desired. As discussed below, present and former military members are governed by a different rule concerning retirement plans division.

How are Pension Plan Assets Divided in a Divorce?

With respect to defined benefit plans (pensions), generally speaking, if the assets in the plan were all acquired during the marriage, the pension payments will be divided equitably (which may or may not be 50/50), unless another agreement between the spouses is reached. Sometimes, however, not  all retirement account assets are earned during a marriage.

For example, a portion of the retirement benefits might begin to be earned before the marriage occurs, after marriage ends, or both.  As a result, the value of the pension plan, and the rights that a spouse may have in the pension plan benefits of the participant, will be complicated, as the non-participant spouse may only have rights with respect to plan assets arising during marriage, unless another agreement is reached.

Options for Pension Plan Division

There are two general options for dividing pension plan benefits in a divorce.

First, the parties may agree upon a division of (or the right to) such assets.  This may entail the participant spouse “buying out” the other spouse through a negotiated settlement (such as offering more property to the other spouse in exchange for keeping the rights to the retirement benefits).

Alternatively, the non-participant spouse can receive a portion of the pension payments that are made after the participant spouse retires, which will be in an amount to reflect the value of the pension earned while the couple was married.  In this case, the non-participant spouse would be paid money directly from the plan.

The value of such payments is complex.  Similarly, in order to receive the benefits in either case, it is critical that a QDRO (or similar applicable order) be obtained.  I can assist in these respects.

How are Non-Pension Plan Assets Divided in a Divorce?

Non-pension plan assets are much easier to divide than pension plan assets, as the value will be much easier to calculate.  With respect to non-pension plan assets, the value that ordinarily would be divisible can be calculated by determining the value of the plan assets (the amount in the retirement account) as of the day the marriage took place (if any), and then comparing such amount to the value in the account as of the applicable separation date.

The participant spouse can then “buy-out” the non-participant spouse through a payment or other property division, or the assets in the account can be divided for each spouse.

Do Military Members Need a QDRO?

No. As a former Air Force attorney, I am aware that there are many current and former military personnel in Colorado, especially in the Colorado Springs area. The distribution of military retirement funds is governed by the Uniform Services Former Spouses Protect Act (USFSPA). The USFSPA is a federal law that addresses property consisting of retirement benefits earned while one or both spouses were in the military.

How Long Must a Military Spouse be Married to Get Retirement Benefits in a Divorce?

Former spouses of military members are entitled to receive a share of retirement benefits directly from the federal government (rather than from their ex-spouse), but only if they were married to the service member for ten years or more during the service member’s term of duty. The law allows Colorado courts to consider USFSPA distributions when making other property and support distributions.

I’m Afraid my Soon-to-be Ex-Spouse May have a Retirement Plan That I Don’t Know About. What can you do?

As part of the divorce process, I will seek to locate any and all retirement plans and determine their value. Once membership in a plan is uncovered – which can be as simple as discovering the spouse’s work history or may require an investigator – ERISA comes in to play.

ERISA requires that the plan administrator cooperate by providing the value of the plan, the projected distributions and other rules and regulations of the plan, including stated beneficiaries and alternate beneficiaries, to anyone who can show a legitimate claim against the plan.

What Happens if a QDRO is not Obtained During a Divorce?

Remember that the Q in QDRO stands for qualified.  It is imperative that any court orders for retirement benefits are “qualified” (meeting the applicable plan requirements); otherwise, future payments (such as pension benefit payments) may be lost.  Put differently, a court order approving the division of retirement benefits is not sufficient protection if it is not qualified.  For this reason, couples who are divorcing should always consider seeking an experienced divorce lawyer in order to protect their rights to retirement account assets and benefits through a valid qualified domestic relations order. 

If you are in the process of divorcing and are concerned about protecting your retirement rights (or receiving your fair share of your spouse’s retirement plan assets), please contact me.

[1] As note in this article, QDROs do not apply to government benefit plans, including military pensions, as other statutes apply to such plans.  For example, for the division of a military retirement benefit, a Military Pension Division Order is used, not a QDRA since a military pension is not considered a “qualified plan.”