You may feel overwhelmed because going through a divorce is overwhelming, especially when you have to figure out how your hard-earned money may, or should be divided with your soon-to-be ex-spouse. Sometimes dividing your retirement account(s) is complicated. Are you armed with some valuable information that will help guide you through the process? Whether you want to protect your retirement plan or you think that you are entitled to some of your spouse’s plan, understanding these potential issues and/or complications can help you throughout your divorce. You will feel more secure if you know what you are up against. You will have confidence that your retirement is being divided fairly.
Dividing a Retirement Plan – Some Common Issues
- Non-qualifying plans
- Immediately withdrawing defined contribution plans
- Immediately withdrawing cash balance defined benefit plans
- Commencement for benefits in traditional defined benefit plans
- Issues with hybrid plans.
Now that I’ve mentioned some of the issues, let’s dive into them in more detail.
If you or your spouse has a retirement plan that does not qualify under IRC and ERISA, you should gather some information regarding the specifics of your plan as soon as possible in your divorce. Many non-qualifying plans won’t allow you to divide the benefits. This can be great news for the spouse who has the retirement plan, but not great news for the spouse who does not have their name on the plan but they need some (or all) of those benefits.
While your divorce is still pending, you can apply for other community assets while the case is still pending. If you would like professional guidance with this type of retirement plan, be sure to contact an experienced family law attorney.
Immediate Withdrawal of Retirement Funds
The spouse that is not the payee of a defined contribution plan will qualify if he or she uses a QDRO; he/she would be entitled to some benefits from the plan. Once the plan processes the QDRO, it awards a lump sum payment. This process usually takes about 60 to 90 days to complete.
Keep this in mind. It is a common misconception that these benefits are received or distributed immediately. If you were planning on using those funds for specific purposes, you should explore alternative options for money until the process is completed. Some plans refuse to pay a lump sum; in others, the plan will immediately award a lump sum amount.
Instead, the employee must be retired or terminated retirement before the plan will distribute the benefits.
Just as with defined contribution plans, cash balance defined plans don’t always result in the immediate lump sum award to a spouse in a divorce.
While some plans allow lump sum distribution of benefits, some plans allow it only when the employee retires or stops working at the company, and some plans don’t allow it at all. You can reviews any restriction provisions in the plan in the QDRO (discussed above).
Traditional Defined Benefit Plans
The wording in a decree can greatly affect when a spouse receives benefits from their spouse’s traditional defined benefit plan in divorce so it is vital that you have experienced attorneys draft the Final Divorce Decree with great care and precision.
This mostly depends on shared and separate interest.
- In the case of shared interest, an alternative payee will get the benefit when the participant gets theirs. The participant can also control the benefit.
- If separate interest exists, the alternative payee can get the benefit at any time.
Lump sum benefits don’t apply to local and state government hybrid plans for alternative payee since a lump sum benefit can lead to valuation issues, payment form issues, and/or commencement issues. This can in turn cause a problem for the alternative payee.
The plan can award survivor annuity if you or your spouse have a federal retirement plan. The specifics of the annuity will vary based on the division order and the wording of the Decree.
Different retirement plans can have drastically different impacts on both parties in a divorce. The first step is identifying all types of retirement plans that you may have in your name and identifying your spouse’s type of plan(s). Then, you need to determine the specifics of these plans and how they will apply to you and your spouse.
I’ve discussed the QDRO so far, but check the next blog for a specific post about the form for it.