Dividing Retirement Assets in Divorce
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A couple=s retirement assets are often the biggest asset to be divided in a divorce. These include employer-based and non-employer based accounts. When facing divorce, here are some practical basics to keep in mind.
All property in a divorce proceeding is presumed marital until proven otherwise. Courts determine whether a retirement account is marital property based on when and how the retirement assets were obtained. In Virginia courts, a retirement asset can ultimately be adjudicated as 100% separate (to be kept by the account-holder), 100% marital (which are divisible upon divorce), or hybrid, this is partially marital and partially separate (of which the marital portion is divisible upon divorce). Retirement earned before marriage are, upon proper proof, the separate property of the party who earned them, and therefore are not to be divided as marital part of the marital share of the account. Conversely, retirement savings earned during the marriage are martial property and divisible upon divorce, unless it is demonstrated that the funds are in fact separate. For example, if a Rollover IRA includes funds from pre-marital 401(k)s, those portions of the IRA could be considered separate provided the owner could sufficiently Atrace@ the funds to their separate origin. Generally speaking, retirement funds earned after the separation date are also separate.
Once a marital share of a retirement account is established the court will determine if and how the asset will be divided. Virginia is an Aequitable distribution@ state. As such, the courts will look at all the marital assets and circumstances of the case as a whole and determine what is “equitable”. Importantly, divorcing couples can also negotiate the fate of their retirement assets outside of court in the form by way of a written marital settlement agreement. If the parties can do so fairly and relatively amicably, this might be the best route to take. It is advisable that both parties seek legal counsel in doing so, however.
Dividing IRAs:
Individual Retirement Accounts (IRAs) generally can be divided by a tax free transfer from one account to another in a divorce. The mechanisms for the transfer are varied and dependent on the account institution. To make a transfer upon divorce, many retirement plans require a court order–a final order of divorce or related decree — that sets forth the transfer. Specific Accounts or Plans differ slightly on the additional requirements. In the case of IRA’s, some financial institutions have their own forms that must be completed and submitted with to a certified copy of the order. Other IRA account institutions will divide the account if (in addition to the Court=s order) a “letter of instruction” from the parties including the account holder=s authorization to divide the account is submitted. Occasionally, for example with some ASEP@ IRAs a QDRO (see below) is necessary to complete the awarded transfer. There are restrictions on what type and form of award can be honored, and what language should be used. An attorney’s assistance is necessary to help you navigate the process.
Dividing Employment-Based Retirement Plans.):
Dividing Defined Contribution Plans (401(k), 403(b) & TSP, etc):
A Adefined contribution plan@ is a plan in which the employee and/or employer make monthly defined contributions to a qualified retirement account in the employee=s name. 401(K) accounts, 403(b) accounts, and the Thrift Savings Plan (TSP) are common defined contribution plans provided through an employer. In addition to an underlying Order that sets forth the award (e.g. a final order of divorce), divisions of these plans require an additional order to be entered by the Court after the divorce is granted and submitted to the administrator of the retirement plan. These additional orders are often called QDROs (AQualified Domestic Relations Orders@) but depending on the type of retirement plan involved, may be referred by another name.
Dividing Defined Benefit Plans (Pensions):
In VirginiaAdefined benefit@ retirement accounts, or Apensions,@ are also divided by Court orders sometimes referred as Court Orders Acceptable for Proceeding (COAPs) or similar orders. Federal government pensions (e.g. FERS) and retirement benefits under the Virginia Retirement System (VRS) are divided in a similar manner as private pensions.
The marital share of the account subject to division as a marital asset is the portion earned during the marriage up to the separation date. For defined contribution plans, that amount generally can be determined based on the service between the date of marriage and date of separation. Calculating the division of a pension (defined benefit plan) can be more complicated, and may rely on a formula to determine the marital share.
Regardless of whether it is a defined benefit plan or defined contribution plan to be divided, there are a number of factors to consider when drafting a court order to divide the asset. A few such considerations are the terms of any marital settlement agreements, loans taken on the retirement account and timing of such, and the various administrative rules of the particular account to be divided among other details. When drafting a retirement order, it is important to have on hand account statements for relevant dates as well as the Aplan documents@ and any account/plan procedures/rules from the retirement account administrator and/or institution. Due to the technical nature of the transaction, to is essential to seek assistance from an attorney to draft and complete retirement transfers.