Home » Episode 13: How Retirement Assets are Divided in Divorce
Frequently the largest assets to be divided in divorce are the retirement accounts – 401(k)s, 403(b)s, pensions, etc. Valuing and dividing those assets without tax consequences or penalties is complicated. In this episode of the Divorce Rulebook Podcast, Pat and Kevin talk about how to factor retirement accounts into the overall division of marital property, including how to properly value and divide them.
Kevin: Hello and welcome to the Divorce Rulebook podcast. I’m Kevin Handy. I’m a divorce attorney with over 20 years of legal experience and the founder and CEO of Snap Divorce, a modern divorce mediation firm with attorney mediators throughout the United States.
Pat: And I’m Pat Cooley. I’m also a divorce attorney. I have more than 30 years of family law experience then I’m the lead attorney mediator at Snap Divorce.
Kevin: If you’re thinking about divorce, or in the midst of one, this podcast is for you. We’re hoping to give you the information you need to successfully navigate the divorce process and avoid the numerous pitfalls that await you.
Pat: So please join us for this episode of the Divorce Rulebook podcast.
Kevin: I’m Kevin Handy.
Pat: And I’m Pat Cooley.
Kevin: And this is episode 13 of the Divorce Rulebook Podcast – How Retirement Assets are Divided in Divorce. So this is going to be a little bit more of a technical episode than our previous episodes. We’re hoping to give you a lot of helpful information about how different types of retirement accounts are valued in divorce and divided in divorce. So what we’re going to cover in this podcast, we’re going to cover, number one, the types of retirement accounts that are divided in divorce. Number two, how those retirement accounts are valued. And that obviously depends on the type of account. Number three, how retirement accounts are factored into the overall picture in divorce when distributing assets. And then finally, number four, how they’re actually transferred from one spouse to another at the end of the divorce. And we’re going to do this podcast in an interview format, so I’m going to be asking Pat questions because I think that’ll work a little bit better. So, Pat, there’s two major categories of plans that I laid out. One is defined contribution plans, four hundred and one K, four, three B, et cetera. And the other one is a defined benefit plan, which is a pension, typically, where you get a stream of payments in the future. So can you talk about each of those and then we’ll talk about how they’re valued?
Pat: Sure. The defined contribution plans are plans where the employee is contributing money. The employer is generally matching. That not always, but generally the idea of them is that there would be a matching contribution by the employer, and those plans have basically a statement value. What’s in the account at any given time can be gleaned from a statement. Those withdrawals are typically made at retirement, and the participant, the person having the plan, can decide how much they want to withdraw each year, and they can vary that if they want. The defined benefit plan is a benefit plan, more like a pension, which is monthly payments for the rest of your life. And those are deferred till retirement. There’s a certain age set in those plans for retirement, and those plans are typically employer funded, although I believe some can have employee contributions as well. Both types of plans can be divided in divorce.
Kevin: So with the divine benefit is you’re getting a certain benefit in the future. In other words, you’re guaranteed to get $2,000 a month when you retire for the rest of your life versus you’re putting money now into some sort of account. And depending on market experience, you may or may not have a lot of money later on.
Pat: That’s right. And in the defined contribution plan you can kind of choose the amount or amount you want to withdraw.
Kevin: Okay, so let’s start with the defined contribution plan. So typically four hundred and one K, four three B plans that most I think people are familiar with. How are those valued in divorce?
Pat: Well, those are basically what I want to call statement value. In other words, the balance in the account is the value of the account. So they’re given a current value by looking at the statement balance.
Kevin: Or are there other things? You can’t always necessarily just look at the statement balance. Right. Because well, no, there might be premarital or postmarital contributions right.
Pat: Not going into a divorce. So keeping in mind that the definition of marital property is property acquired from the data marriage to the data separation. When we’re looking at the value of the account, it’s the statement value. But when we’re looking at valuing it for marital purposes, in other words, what’s the marital value we’re going to look at? Was there a value at the data marriage? What’s the value at the data separation? And if the parties have been separated for a period of time before we’re looking to distribute the account as a marital asset, then we’re going to have to look at have there been post separation contributions and has there been market experience on the accounts? So those are all factors that have to be taken into consideration and then there are some factors that we have to be careful about because there’s different ways to remove money or to obtain money. When you have a 401, you can withdraw it.
Kevin: I’m going to get to those kind of questions in a second, but I want to just again focus on the basics of valuing the marital value of the 401 or other defined contribution plan. So how do you mentioned, okay, you have to find the value at beginning of the marriage, the end of the marriage, and then the present value. How does one go about figuring out what those values are?
Pat: Well, I mean, we do discovery. If it’s your own client, you ask your client to produce the statements. If it’s the other side, we do discovery and we ask them to produce statements that will reflect those values.
Kevin: Someone’s going to have to go to their employer and hey, do you have a statement from 20 years ago showing when we got married, what’s in the account? Is that what you’re talking about?
Pat: That’s right. That’s not always easy. Sometimes it’s hard to dig back if it’s many years. But that is exactly what we need. We need someone who saved your old statements. Can you go to your employer and see if the employer can give you that history as to what the date of marriage value was on the account?
Kevin: So if, let’s say someone had an account premarital, they had it during the marriage, you still have it, you go back and get all the statements. There’s also market fluctuation going on with that account. The 401K goes up, it goes down as simply as you can. Can you give an example? How do you figure out what’s marital for distribution purposes and then what’s we’re going to say separate the person gets to keep for themselves.
Pat: Sure. And it is somewhat a complicated calculation, but the simplest way to explain it, most precise way is we apportion it. So we start with a data marriage. Was there anything in the account? If so, then we look at the data separation, the increase in value, that would be the data separation balance minus the marital balance. If it’s increased in value, that increase is marital. And so as of the data separation, we’re able to define the marital portion of the account. Now often the divorce doesn’t happen on the data separation, almost always. So there’s going to be a period of time, a lapse in time until the account is being distributed. So during that lapse in time, there may be contributions to the account. Any contributions to a retirement account post separation after you separate are not marital, so they have to be backed out. So we just add up the post separation contributions. We now will know the nonmarital portion. The nonmarital portions are any premarital portion. Again, that’s the date of marriage ABalance. And any post separation contributions, you add those together, you have the nonmarital portion. So now here’s where it gets a little tricky. We’re going to apportion the gain or loss going forward from the data separation between those two components, between the marital portion and the non marital portion. So we create a fraction, we do a ratio. In other words, what percentage of the total contributions does the marital portion represent and what total of the contributions does the nonmarital portion represent. And then we simply use those percentages that we derive and multiply it against the current balance. That’s not always an increase. Sometimes the accounts have lost money because we go through significant periods where retirement accounts lose value. So we apportion either the gain, if that’s appropriate, or the loss.
Kevin: Right. And I would just note that it was kind of implicit in what you said, but I think it’s worth explicitly stating that if you come into the marriage with an amount in a 401K, any gains on that amount during the marriage are also marital.
Pat: That’s right.
Kevin: Okay, and you started getting this before. What if there’s like loans against the account or someone withdrew money. How’s that dealt with?
Pat: Well, and again, that depends on when the loans were taken. If the loans were taken against the account during the marriage, then they’re marital debts. So they are, so to speak, not added back to the balance when we’re determining it, because that’s a marital debt. If they’re taken out after you separate, we have to add that money back because that is part of the total account balance. Post separation loans are kind of advances against the 401 or the defined contribution plan. All I can say, the easiest thing I can say is you have to take them into consideration. The person might have had an amount equal to the loan prior to the marriage. So we’re going to have to take a really close look at what is the loan, how much is it and what was it taken against, and make sure that is taken into consideration when we’re doing the value.
Kevin: Sure. And also, maybe if it’s a post separation loan, what was it used for? That’s right, because maybe it was used to pay off marital debt or was it used for personal expenses, that sort of thing. But I don’t know. That’s sort of getting into the weeds, I think, kind of jumping ahead. Okay, let’s say you come up with the marital value. You go through all your calculations, you look at your statement, you’ve got a marital value, and then you decide, okay, well, one of the parties is going to get let’s say the parties are going to split the account 50 50, but you say, okay, well, there’s $100,000. We figured out there’s $100,000 in marital value and we’re going to split 50 50. We each get $50,000. But the transfer is not going to occur instantaneously when you decide that maybe months later. Right, and so then there’s still gains and losses going on in that account. How do those get handled?
Pat: So there’s two different ways to handle that. Once you’ve determined what you’re going to use as the marital value, whether you’re using that in the terms of an agreement or you’re using it the day you go to court, you’re going to have a marital value. And that’s already taken into consideration gains and losses up until that point in time going forward, since it’s going to continue to be invested until it’s divided. We will use language if we want to capture the gains and losses. The parties or the court will use language that says that the marital value that’s being distributed is subject to gains and losses going forward. But parties can agree or the court can order that it’s to be a fixed transfer. So it’s kind of a game of chance. You get to decide, do you want to agree to take a fixed amount? And that way if it gains, you don’t get the gains, but if it loses, you don’t lose any money, or do you want to leave it subject to market experience, in which case you will either receive the gains or lose what has been lost on the account due to the investment.
Kevin: Is there advantages and disadvantages to each other than, as you said, are you going to take the chances with the market gains and losses?
Pat: Yeah, it’s hard to say what the advantages are because you can’t predict what’s going to happen with the market unless you’re really good. But what I can say is the most accurate way to do it and the most realistic way is to include the gains and losses going forward.
Kevin: I’d say that in general, that’s the best and fairest way to do it. But sometimes you do run into problems with maybe the plan won’t calculate those gains and losses, and then it becomes another administrative headache and cost as well.
Pat: That’s right.
Kevin: A little story. Not too long ago, I feel like several of our mediation clients were doing fixed amount transfers. And at least on two occasions, what happens is one party agreed to transfer a fixed amount to the other party and then in the interim COVID hit or whatever, and the retirement accounts went down in value below the amount that was to be transferred. And that just created such a administrative nightmare and headache that the agreements had to go back and be renegotiated. Is there going to be makeup payments from somewhere else because there just wasn’t enough money in the account. So that’s one of the dangers of doing a fixed amount transfer, and we.
Pat: Can’T guarantee how quickly the transfer will take place. So that is a risk of trying to do that type of transfer.
Kevin: All right, well, let’s take a quick break here, and when we come back, we’ll talk about how defined benefit pensions are valued and then how both defined benefit and defined contributions are factored into the overall property distribution scheme and divorce.
Pat: Hey, podcast listeners, are you thinking about divorce but are worried about the cost and animosity associated with the traditional divorce process? Well, Snap Divorce has a better way for you to divorce. Through divorce mediation, snap divorce eliminates everything bad about traditional divorce. With Snap divorce, there is no court, no dueling lawyers, and no endless delays. Our experienced attorney mediators help you and your spouse resolve your divorce fairly easily and amicably. Best of all, Snapdivorce does it for a reasonable flat fee. Schedule your free consultation now@snapdivorce.com.
Kevin: Okay, we’re back. Okay, so, Pat, let’s talk about defined benefit pensions. How are they valued in divorce?
Pat: Well, defined benefit pension is valued by looking at what has been accrued as the benefit. And what that means is if the person stopped working today, what would they be paid as their retirement benefit on a monthly basis when they retire. And that figure is derived from the pension plan. So we have to go to the pension plan, and we have to know what that accrued benefit is. Now that’s not the end of it. In order to determine the value, they’re going to look at the again, we’re going to try to capture the amount that was accumulated during the marriage. That would be the data marriage to the data separation. So typically we’ll hire actuaries who prepare these pension plan distributions. We’re going to pension plan valuations, valuations, I’m sorry. And they’re going to apply what we call a coverture fraction. And that coverture fraction is basically the length of the marriage over the entire length of the plan up to the date of the accrued benefit that you’re using. So we’re creating a fraction to parse out the marital portion of that retirement benefit. And then they use actuarial principles to figure out what the future stream of payments would be worth in a current value.
Kevin: In other words, they’ll take maybe that maybe the accrued benefit just say it’s $2,000 a month. They kind of look at and say, let’s assume it’s all marital. The whole pension was accrued during marriage so you don’t have to apply coverage or fraction. They’ll kind of look and say, all right, $2,000 a month. When the retirement date is the person 65, what’s their life expectancy? How much are they likely to collect under the pension over their life expectancy, post retirement life expectancy. And then they use math and investment rates to bring that back to what would you need today to invest to get that pension in the future? And that’s the present value.
Pat: That’s right. If you’ve ever looked into annuities separate from a pension, that’s kind of how they work. They’re really trying to figure out what would you invest today to have that stream of payments in the future. And that would be your value that we’re using in equitable distribution.
Kevin: Is it always necessary to get a value for defined benefit pension?
Pat: It is not. Typically the value is used to determine a current value so that an immediate offset of that asset can be accomplished. And what do I mean by that? An immediate offset is we’re going to distribute that asset to the pension holder and then we’re going to offset it with other assets to the non participant in the pension. So when you’re distributing the pension to one party, you need to have a current value. But there is an alternative. The alternative is, and this is where we don’t need a value necessarily, is we distribute the pension in kind in the future. So when the pensioner becomes of retirement age, then the pension can be divided so that the plan pays the other spouse, the non pensioner, their share of the plan directly. And that’s called a deferred distribution. So we have an immediate offset which is where we value it, or we have a deferred distribution where we don’t need the value because we’re actually dividing by a formula at the time that a plan is in pay status.
Kevin: Yeah, I think that the deferred distribution usually comes into effect when the parties have divided everything else, but they just want and maybe they commit with a percentage. One party is getting 45% of the assets, the other person is getting 55. And then they perhaps split the pension payments in the future the same way. 45, 55%.
Pat: That’s right. But only the marital portion of those payments so that any port of the pension that might have been accumulated before they got married or that is accumulated after they separate is parsed out. And they’re only dividing the marital portion at some future time.
Kevin: Let’s assume that they’re dividing the marital portion at a future date. They’re going to divide the payment stream. Can you tell our listeners what is a survivor annuity and why is that important?
Pat: So a survivor annuity is paid to a named beneficiary on certain circumstances, basically upon the death of the participant. So there are pre retirement by the.
Kevin: Participant, the spouse or the pension pensioner or whatever you would call it.
Pat: That’s right. So there’s pre retirement survivor annuities, which are paid if the person dies before the pension is in pay status. There’s post retirement survivor annuities, which is paid if the pension has gone into pay status, it’s being paid and then the person dies. Used to be very important to be sure that the non participating spouse was named as the survivor beneficiary. However, in more recent years, plans have been more willing to accept recalculating the spouse’s share, the non participant’s share over that spouse’s lifetime. Which means that if the participant, the pension receiver, dies, the other spouse continues to receive their benefit over the lifetime. If the plan won’t amortize the benefit over the spouse’s lifetime, then you must make sure you protect the spouse’s benefit by having the pension participant name that spouse as a survivor to the extent of their share of the plan at least. Because if you don’t have that language, either the amortizing over the person’s lifetime or the survivor benefit upon the death of the participant, the plan terminates. And so the spouse wouldn’t have any protection without one of those two things. Yeah.
Kevin: So essentially you’ll make sure that the non participant, non pensioner spouse who’s getting a portion of the pension doesn’t lose their income stream if the participant pensioner were to die previously prior to the other party.
Pat: That makes sense.
Kevin: That’s correct. All right, let’s say now you’ve got values on the pension or the other retirement accounts that defined contribution plans. How do you factor that into the overall divorce distribution scheme?
Pat: Well, there’s a couple of ways. I mean, once you have the values so again, with the defined benefit pensions, the ones that are deferred, it’s a stream of payments in the future. You touched on this, but I just want to say that typically if the pension is very large in comparison to the rest of the marital estate, it’s often split on a deferred basis in the future. So if that’s the case, then it is kind of set aside on its own and you don’t have to worry about it with the other assets because you’re dividing it on its own and the percentages are set forth. If you’re doing an immediate offset and you valued the pension, then we kind of do a chart. Husband gets these assets, wife gets these assets. And if the pension would go on the side of the person who is the participant in the pension, then we have to make sure that while we’re doing equitable distribution, that we’re putting other assets on the side of the person who doesn’t participate in the pension so that they get an equal value or an equitable value. Because some states divide property equally and some divide it on an equitable basis. But whatever the division is, it’s offset in that division of assets. Now, the defined contribution plans sort of the same thing. If they’re extremely large in comparison to the rest of the marital estate, sometimes we’ll offset them and divide them separately from the rest of the estate. Other times they’re incorporated in. But one very important thing to remember when you’re dividing or comparing pension plans, retirement plans to other, what we call liquid assets, cash in the bank, cash in a house, you got to keep in mind that retirement assets are for the most part taxable, meaning that you haven’t paid taxes on those yet. You’ve deferred the distribution and you’ve deferred the taxes. So I often say to people, $100 in the pension, I’m sorry, $100 in a house isn’t equal to $100 in the pension because if you get the pension, you pay taxes. And so now you’ve got $70 to the other person’s. Hundred dollars. So just an example of how you’ve got to be careful to also take into consideration the tax consequences that will arise from distributing retirement accounts.
Kevin: Right. So I guess it’s a simple example. If one party is keeping a 401 that’s worth say, $200,000 the other party’s got, if it’s going to be a 50 50 distribution, the other party has to have either $200,000 in retirement assets on their side or maybe whatever 70 or 80% of $200,000 in cash on their side.
Pat: That’s right. If you’re looking at 50 50, yes, that’s what you would say.
Kevin: And if it’s ultimately, like you mentioned, if one of the retirement assets is very large, usually there’s typically going to have to be a transfer of retirement money from one party to the other.
Pat: That’s right. We talked about kind of how you divide a pension. It’s either immediate offset means it goes to the one person, a defined benefit pension. Deferred distribution means it’s it’s split in kind and we don’t worry about it. But with defined contribution plans. And that’s going to include not only your 401 KS and 403 B’s, but your IRAs and your thrift savings plans and any of those type of savings type investments. Those can be divided so you can transfer money from one to the other without any immediate tax consequence, and that transfer transfers the tax consequence to the receiving spouse.
Kevin: Would you say it’s typical that retirement assets are going to be divided in that sort of manner in a divorce?
Pat: I do, especially my cases. I mean, I like to look at the retirement accounts because of the tax consequences very carefully. And more often than not, it makes most sense to divide retirement accounts as retirement accounts and not to offset them with cash assets. If you can do that.
Kevin: One broad generalization would be that you want kind of each party to walk away with their percentage of both cash and retirement assets if you can. So if one person is getting 45% of the marital state, they should kind of get 45% of the retirement assets and 45% of the cash. But I guess my point was going to be that I find that retirement accounts usually make up a large portion of the marital estate maybe 70% of the time. One party has a very large retirement account and the other party doesn’t. And so I’d say 70% of the cases there’s going to be a transfer of retirement funds from one party to another. Do you think that’s fair?
Pat: I agree. I agree that a large majority of the cases you’re going to see retirement monies being transferred or divided in some fashion. Sure, there’s the exceptions to those rules.
Kevin: All right, well, I actually think that’s a perfect time for a break. And then when we come back, let’s talk about how they are actually transferred from one party to the other.
Pat: Hey, podcast listeners, are you thinking about divorce but are worried about the cost and animosity associated with the traditional divorce process? Well, Snap divorce has a better way for you to divorce. Through divorce mediation, snap divorce eliminates everything bad about traditional divorce. With Snap divorce, there is no court, no dueling lawyers, and no endless delays. Our experienced attorney mediators help you and your spouse resolve your divorce fairly easily and amicably. Best of all, Snapdorce does it for a reasonable flat fee. Schedule your free consultation now@snapdevorce.com.
Kevin: Okay, we’re back from the break. Now we’re going to talk about how retirement accounts are actually transferred. So I think when thinking about transferring retirement accounts, there’s sort of two big categories. One would be personal accounts, and then the other would be employer sponsored accounts. And they’re transferred kind of different ways. So do you want to sort of talk about that, Pat?
Pat: Yeah. And while you’re making that differentiation, I think it’s important to know that there’s a federal law, it’s called ERISA. It pertains to retirement accounts. And it is the law that for certain retirement accounts allows the transfer without any immediate tax consequence, but not all retirement plan. And that could be both the defined contribution plans and the pensions, the defined benefit plans. But not all retirements fall under ERISA. That’s ERISA. ERISA it’s, again, a federal law.
Kevin: It’s like the Employee Retirement Income Security Act is what that stands for, and.
Pat: That permits the transfer of money on certain employer funded retirement accounts, whether they’re pensions or 401, via a mechanism called a Qualified Domestic Relations Order. And you’ll hear that also thrown out as a quadro QDRO, qualified Domestic Relations Order. So one way to transfer funds is through that mechanism, but not all plans are under that mechanism. We have plans. Like individual Retirement accounts and Sep IRAs small Business accounts. There are county pensions, police pensions, government sponsored, government sponsored and thrift savings plans. So there’s a number that fit into a category where they don’t fit into the ERISA plan and they can still be transferred. But they don’t need to use a quadro to transfer those funds. You need a Marital Settlement agreement and a decree, a divorce decree.
Kevin: Let’s just start with the simplest ones. I’m going to call them personal retirement accounts. So you’re really talking about IRAs Roth? IRAs? Maybe sept IRAs. It depends. Because they’re kind of employer sponsored. It depends. So let’s just start with the basics. Most people are familiar with IRAs or Roth IRAs. That’s what most people are going to have. So how are they transferred from if you’re splitting it or something like that?
Pat: Right? So if you’re going to split it, that’s spelled out in detail either in the court decree and order of distribution of property, or in your marital settlement agreement. And so then you have to go to the plan and tell them to divide the money. Now, in order to divide that money without causing it, in other words, transfer money to the other spouse without causing immediate tax consequences, it has to be done pursuant to a divorce action, it has to be done. You’ll need terms in an agreement and you’ll need a divorce decree. Those two things, the divorce decree and the terms of your agreement will be submitted to the plan with a request for the transfer.
Kevin: As long as you have these two things, it’s pretty easy.
Pat: Those are the very basic things you need. And the main reason you need those is to avoid immediate tax consequences. Now, each plan will sometimes have their own specific requirements. Some of them ask you to do a quadro, even though technically it’s not required. So you could fall into a category where you have to do a quadro anyway. Some of them require transfer letters, each party. They require you to open an account with their financial institution. So there’s some individual requirements. But the main thing that you want to do when you’re transferring retirement assets is avoid the immediate tax consequence. And that’s done by having it be part and parcel to a divorce action.
Kevin: Yeah, and we say tax consequence not only the tax on the money that would be coming out, but also any. Penalty related to it. And that can be pretty significant.
Pat: That’s right. And just to be clear, what’s happening is the money is being transferred to the other spouse, and now each spouse pays the taxes on their own respective.
Kevin: Share when they take it out in the future.
Pat: That’s right. Yeah.
Kevin: Okay. All right, so let’s move on to employer sponsored. There’s going to be some employer sponsored plans that are qualified under arrest, and then there’s some non qualified plans which might be like a deferred compensation, something like that. But let’s talk about 98% of the time we’re going to be dealing with what are called qualified plans. They meet certain requirements under ERISA, how are they going to be transferred? And you mentioned qualified domestic relations tours. Let’s talk about that.
Pat: Right. So that’s going to be your mechanism. Once again, you still have to have it in a formal agreement or a formal decree of court. So it has to be pursuant to the divorce action. And then you’re going to have the qualified domestic relations order prepared, which will spell out the terms of how much money is to be transferred or what percentage of the account is to be transferred to the other spouse. The qualified domestic relations orders are typically drafted and then circulated to I’m sorry, prior to circulating, they’re usually drafted, submitted to the plans for pre approval. So the plan will look at it and say, this looks okay. Or they’ll look at it and say, oh, we want you to change these few small things on the quadro before we’ll accept it. Not all plans offer the pre approval process, but to the extent they do, that’s the best way to proceed. Once it’s pre approved by the plan or prepared. And in the case of a plan that doesn’t pre approve, it just ready to go. It’s submitted to the parties and their attorneys to review and approve. Once the form is approved, it’s then submitted to the court. It has to be entered as an order of the court. So the court will then sign it as a court order, and then it comes back and is resubmitted to the plan for final qualification. So the pre approval is not enough. It has to be signed and a certified copy goes to the plan, and then the plan will ultimately issue a letter of qualification. If you’re doing a distribution on a defined contribution plan, the next step will be they’ll contact the recipient of the transfer, the non participant spouse, and work out how they’re going to transfer the money from the defined contribution plan to the other spouse. And most typically, it’s rolled into another retirement account. But it also can be withdrawn, understanding that there’d be immediate tax consequences if it is withdrawn.
Kevin: I know with 401 KS, the parties have an opportunity to withdraw money at least penalty free while this process is going on. But not tax free.
Pat: Not tax free. Not penalty free. And it’s only kind of a one time thing. Once it’s put into an IRA or similar mechanism, it can’t be withdrawn without penalty. So there is at that moment of transfer, you would want to explore whether or not you want to take part or all of the funds out.
Kevin: So the process of getting qualified domestic relations orders, there’s many steps and it’s pretty involved. Is that fair to say?
Pat: It is. And I was sort of speaking to the defined contributions plans. That kind of happens after the quadro is in place, they’ll distribute the funds to the other spouse. Then you have the deferred compensation plans. That quadro will be submitted to the plan, the plan will approve it, but then there’s a delay. There’s typically a wait until the participant spouse is of age to retire before withdrawals can be made. So that just kind of gets filed with the company, with the plan. And then when one of the parties requests that their portion goes into pay status, then they’ll pull out the quadro and implement it at that time.
Kevin: From the time you start drafting, you finished your divorce. Now you’re ready to get the qualified domestic relations order drafted and in place and with the plan. What time frame are you talking about?
Pat: Well, so let me say this. The shortest I ever had one done was a month, and the longest was three years. But the average is several months. You should expect possibly even a three or four month delay. It could be faster, it could be longer, but generally you should expect several months.
Kevin: Is this something like that people can handle themselves? Is it like a do it yourself type thing?
Pat: It’s a complicated process because first of all, the order has to be prepared in a very specific way in order to meet the federal standards and allow this transfer to occur tax free and there’s court involvement and there’s review. So I find that people who have embarked on that endeavor usually end up asking for help at some point in time because there’s a lot of technicalities, a lot of things you have to do to get it finalized.
Kevin: Yeah, I’ll just note for the listeners, we actually farm our quadrants out to expert drafting. A good portion of the time we don’t even do it ourselves. It can be very complicated, especially if you’re talking about defined benefit pensions. There’s all kinds of specific language and if you screw it up, you can really screw up your transfer, your retirement, and can be really kind of a quagmire.
Pat: Let me just say as an aside, we’ve talked about some of the more standard kinds of pensions, but there are certainly much more complicated pensions, military pensions for those of you in the military, the old railroad retirement pensions. And really to do that without an expert would just be treacherous. You have to make sure that your quadro is going to work.
Kevin: Yeah. For what you’re trying to accomplish, you got to make sure it’s going to work. It’s got the magic language, whatever. Like I said before, a lot of those qualified domestication, George, we will send them out to lawyer, expert lawyers, that literally, that’s all they do is draft these orders.
Pat: Right. And on the non ERISA plans, again, we were kind of talking about the, ERISA plans. On the non ERISA plans that are employer sponsored plans, you’re still going to expect an order similar to a quadro to be prepared. Military plans are called a court order, acceptable for processing.
Kevin: There’s other names for them, but government plans have similar provisions, either in state law or wherever, that are similar to quadrant. I will say, though, that not all plans accept any kind of quadra. I had a case with a deferred compensation plan and the employer’s position was, we don’t take any of these orders. The spouse that had the deferred compensation plan would just, you know, we’d have to enforce it against him in the future when he started collecting on it. And that was a real problem.
Pat: Right.
Kevin: There was just nothing you could do because it was just an Odball plan that wasn’t subject to any sort of requirement that they obey a court order telling them to distribute it otherwise.
Pat: Right, but that would be a very far exception to the rule.
Kevin: Yeah, I’ve seen that once in my career, that there was something of course, it was one of those cases where the husband had already dissipated all the other assets and that was all that was left. And that was the one asset we were trying to lock down. All right. I kind of think we covered pretty much everything. I mean, can you think of anything else that you would want to tell the listeners?
Pat: No, not really. I think just some of the highlights are these are very technical plans. Getting the proper quadrant, the proper expert to prepare it is very important. The self help with something like this is definitely not recommended because this is a very intricate part of your divorce. It can be a very valuable asset. So it’s not something you want to have done wrong. And you’re certainly in a defined or a deferred compensation plan, the pensions, you don’t want to be worried, like, 25 years from now trying to figure out what went wrong when it doesn’t work.
Kevin: Yeah, I agree with 100% with what you said. And these really are usually, besides maybe the marital residence, if there’s a lot of equity in these are usually the biggest assets in a marital estate and in a divorce. And it is important to know what they’re worth and get them distributed correctly. And I’m surprised how often clients will balk at, oh, I don’t want to spend $250 to get the pension valued. Meanwhile, the pensions could be worth half a million dollars. It’s just something you don’t want to mess around with. You want to make sure you know what these are worth, make sure they’re distributed correctly, then qualified domestic relations orders, they can cost, I don’t know, a couple of $1,000 by the time you’re all said and done, depending how you’re doing it. But again, it’s a small expense, considering if you don’t do it right, you may be paying tens of thousands of dollars in taxes and penalties, or the account doesn’t get distributed, or you lose out on gains. Whatever changes to the pension in the future, enhanced benefits, or your spouse dies. And, oh, you forgot the survivor benefit. And now you’re out of luck. So just if you have a retirement asset and divorce, make sure you go through the proper steps to get it valued and distributed properly. All right, well, I guess that’s it. I’m Kevin.
Pat: And I’m Pat.
Kevin: And thank you for listening to this episode of The Divorce Rulebook Podcast.
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