Qualified Domestic Relations Orders
Pensions and other deferred compensation plans are important assets to be distributed in a divorce. They can either be traded for other assets or divided between the parties. Qualified Domestic Relations Orders "QDROs" are used to divide private sector pensions and 401(k) plans that are covered by federal law
Other pension orders are used to divide public sector pensions, 457 plans, thrift savings plans, military pensions, and other public sector deferred compensation plans. Pension orders sometimes award a spouse's share of a pension or other plan in a lump sum, and sometimes as a monthly benefit. There are generally choices as to how to handle the payments after the death of either of the parties. Sally Cooperrider can help you draft an order that is appropriate for your situation.
The Division of Retirement Plans in a Divorce
There are a lot of financial and other decisions to be made when a couple is separating, one of which is how to divide the pensions, 401(k)s, IRAs, and other retirement assets. If the couple works together in a Collaborative case or other negotiated divorce, they can find creative ways to divide these assets to fit in with the overall future financial plans of the spouses.
There are two main types of pensions: defined benefit (a monthly pension, like PERS) and defined contribution (a sum of money, like a 401(k)).
If both parties have retirement accounts, one method of division is to determine the community property values of all the accounts so that they can be set off against each other. An actuary may be needed to determine the cash value of a defined benefit account, or to trace the community interest in a defined contribution account. A tax-free rollover is then made from the accounts of the spouse with more retirement assets to equalize the accounts.
In some cases the retirement assets can be traded against other assets, such as the house. If this is done, the retirement assets are sometimes valued with a discount, since they are pre-tax assets and will be taxed when withdrawn.
If there are no assets to trade against, or if both spouses want the monthly income from a defined benefit pension, the pension benefits can be divided so that each spouse will receive a monthly check from the retirement plan upon retirement. Or if only one person has a defined contribution account, one-half of the community funds in that account can be rolled over to an account for the other spouse. A special order is needed to require the pension plan to divide the monthly pension benefits, or to roll over part or all of the assets in a defined contribution plan. The order is called a QDRO (Qualified Domestic Relations Order) for private sector plans, or a pension order for government plans.
In order to decide what method of division is best for the spouses, and to see the effects of different methods on the finances of each party in the future, a divorce financial planner can be helpful. In a Collaborative Divorce, the financial planner will usually be part of the team. In other divorces, the financial planner can be consulted separately. The decision about the retirement accounts can then be incorporated into the overall divorce agreement.