Divorce and employment retirement accounts
Retirement funds earned during a marriage are generally community marital property. Like other funds and assets, retirement accounts are valued and divided in a divorce. During the discovery phase of a divorce case, both parties exchange their financial information and accounts, including any employee retirement benefits to which they have an interest. The general rule is that money earned in retirement accounts during the marriage will be community marital property which is divided between spouses during divorce. Retirement accounts such as 401(k) and pension accounts are divided at the end of the divorce, valued on that date, and distributed according to the rules of the account plan manager and the language in the divorce settlement or judgement.
A variety of options in employee retirement account division in divorce
An employee who is married and earning money in their retirement account, such as a 401(k), will likely be ordered to pay half of the value of the vested retirement fund in a divorce. However, in some cases, spouses chose to estimate the value of their legal share of retirement accounts and accept equivalent cash or accounts so that the other may keep their employee retirement account, so it may continue to grow.
Employees with pensions may also divide the proceeds of a pension that will not pay out until the future, upon a qualified event, such as retirement. When the employee is qualified to start receiving pension funds, a portion or half of those pension funds can be ordered to be distributed to another person, such as former spouse. Likewise, with retirement funds, employees with pensions who get divorced may agree to offer alternative payment options to their ex-spouse.
Lump sum payouts are available based on the structure of the pension fund or retirement account plan administrator’s rules and policies kept by each institution. For example, a state teachers retirement and pension system may have very different rules when compared to a privately held business with a standard financial institution-managed retirement plan.
What is a Qualified Domestic Relations Order?
The common document used to divide a pension or qualified retirement account such as a 401(k) and similar, is called a Qualified Domestic Relations Order (QDRO). In your divorce settlement or judgment, it will likely state that a QDRO must be entered and filed with the court within a certain number of days following the divorce. The QDRO language usually states that the retirement funds should be valued for division as of the date of the divorce.
Most financial institutions and pension administrators have their own forms or language requirements and instructions for employees going through divorce. The attorney, for the employee whose retirement account or pension is to be split, will file the completed and approved QDRO with the court and then when approved by the court, send a certified copy to the plan administrator who will then divide, and direct proceeds of the retirement account split as it is directed in the language of the QDRO.
