Retirement Division/QDROs

1. Division (Generally): Pensions and many deferred compensation accounts, such as 401(k), 457 and 403(b) accounts, require a special order to divide them pursuant to the terms of a Judgment of Legal Separation or Dissolution of Marriage. That special order is commonly referred to as a QDRO or DRO. Individual Retirement Accounts (IRAs) can be divided with a copy of the filed Judgment and do not require a special order to divide them.
2. QDRO (pronounced “Quadro”): A Qualified Domestic Relations Order (QDRO) is a special order that provides specific division instructions in the required language to the Plan for retirement benefits. Public retirement benefits, as opposed to private, are not technically “qualified” and, therefore, often refer to these orders as simply Domestic Relations Orders or DROs.
3. Defined Benefit Plan: A pension is a “defined benefit plan.” This means that the Plan will pay a specific (defined) benefit from retirement through a designated lifetime (or joint lifetimes), rather than a specific fixed dollar amount on deposit.
4. Defined Contribution Plan: Deferred compensation accounts, such as a 401(k) account, are “defined contribution plans.” This means that contributions are made to the account and those specific dollar amounts are available (possibly subject to vesting).
5. Vesting: If there are specific requirements that must be met prior to benefits being available to the employee, this is referred to as vesting. For example, if an employee must work a minimum of five years before being eligible for any pension benefits, such benefits will not be “vested” until the 5-year mark is reached, even if they are accruing in an account for the earlier years one through four. Even benefits that have not yet vested potentially have value as a community asset and should be addressed in the property division.
6. Timing: Retirement benefits that are to be divided under the terms of the divorce should be addressed at the time of the divorce, not years later. Unfortunately, many family law attorneys do not feel comfortable doing QDRO work. Nonetheless, your family law attorney should be assisting you in finding someone to complete the division at the time of the divorce. Waiting could delay retirement if it has not been completed by the time of retirement. More importantly, waiting risks loss of benefits for the non-employee spouse if the Plan was not properly joined to the case (“joinder”), the employee or non-employee dies prior to the benefits being divided, the employee does not select the proper option at retirement, and/or the employee has a new spouse at retirement or death.
7. Participant/Member: The employee party.
8. Alternate Payee/Nonmember Spouse: The non-employee spouse who will be receiving a share of the employee’s benefits.
9. Division Methods:
   1. Shared Interest (also known as time rule) for Pensions: This method of division allocates a portion of the pension benefits to the non-employee spouse, while keeping it part of the one overall account. In general, the non-employee spouse will not receive her share of the benefits until the employee spouse retires. In general, the non-employee spouse’s share of the benefits will be based on pay at the employee’s retirement, so there is a sharing of pay increases between date of separation and retirement. The employee spouse must make a specific designation at retirement to ensure benefits to the non-employee spouse do not cease at the employee spouse’s death. Overall, there is potential upside for sharing in pay increases, but less control over timing and options.
   2. Separate or Segregated Interest for Pensions: This method of division segregates the non-employee spouse’s interest into his/her own account, so that it is no longer tied to the employee spouse’s account. This allows the non-employee spouse to control the payment timing (so long as eligibility requirements are met) and option. In general, the benefit will be based on date of separation pay, which may be lower than the pay used as a basis for the shared interest.
   3. Defined Contribution Accounts (401(k), 457, 403(b), Etc.): These accounts should not be divided “according to the time rule.” The “time rule” is more properly applied to a pension, not a deferred compensation account. If there were no contributions made prior to marriage, a simple division could be 50% of the date of separation balance, plus earnings and losses thereon through the date of division. If there were contributions before marriage, there will need to be an analysis and allocation of the separate and community portions of the account to determine a percentage or dollar value for the community interest and the non-employee spouse’s interest.
10. Complicated Issues: Retirement benefit divisions can be complicated issues. Ensure that you have assistance from a knowledgeable resource. Many considerations must be taken into account, depending on the specific plan, the individual circumstances and the desired outcome. If you are not equally dividing retirement benefits (e.g. offsetting for other assets), you need to have the community interest in the benefits valued by an actuarial expert and remember that these benefits are generally pre-tax (taxes haven’t been paid yet and will have to be paid when the funds are withdrawn).