In Part 1, we discussed what is or isn’t a “marital” retirement asset and considerations for dividing the asset. In this part 2, we’ll discuss the valuation of a retirement asset as well as the logistics for separating retirement assets post divorce.
Valuing & Divididng Retirement Assets
Most retirment assets, like 401(k), 403(b), TSP, IRA, and Roth-IRA accounts, have a “face value” or readily accessible account balance. Plan participants receive periodic statements, or log in to the account online. But, with securities (like stocks, mutual funds, and bonds) account balances fluctuate by the minute.
Timing of Valuation
Under Maryland Law, the court values retirement assets at one of two times. Judges usually value an asset at the time of divorce, but may also do so within a short period of time (e.g., within 90 days) after the date of divorce. (In some cases, a judge may require a subsequent hearing after divorce to value and divide assets.) Judges can also order division of assets on an “if as and when” basis — the timing and amount to occur upon a future trigger event.
However, in out-of-court mediation, couples may elect any other date on which they agree. Typically the value would be made prior to a divorce, since the agreement to divide the assets is entered into prior to a divorce. Many couples look at the date when they separated, at the end of a recent quarter or fiscal year, or the date they sign a final agreement.
Valuing Defined Benefit / Pension Plans
We must approximate values for “defined benefit plans”, which are most commonly pension plans. While plans may provide a balance of all contributions, the actual value is usually higher. A pension plan promises to pay the employee a fixed payment (defined benefit) starting at a determined retirement age and continuing for the remainder of the employee’s life.
A Pension payment amount is usually determined by a formula. Commonly, the payment amount is determined based on the length of employment, multiplied by a fraction, multiplied by an average salary. The total value of these accounts depend on the participant’s age, life expectency, salary amount, and the discount rate (or rate of return), which requires us to approximate the value . Employees can designate a beneficiary to receive payments after death, which also affects value. Divorcing couples either divide these accounts utilizing an approximate value, or the pension plan can be dividided and paid on an ‘as if and when’ basis.
Deciding How To Divide A Retirement Account
For accounts with readily available account balances, and after the parties pick a valuation date, the parties compare values. One common way parties divide retirment is 50/50. Here, the parties total all marital account balances and divide by two. The spouse with more makes an equitable adjustment (payment) to the other spouse to arrive at the equal value.
Retirement Plans charge fees, taxes, and penalties when a participant withdrawls funds from a retirement account unless eligible. Fortunately for divorcing couples, ERISA (federal law governing retirement assets) allows an exception in the case of divorce. To avoid penalties and taxes, couples must comply with ERISA regulations to divide marital retirement assets. In some cases, particularly IRAs, the account holder may request a divorce transfer at the financial institution. But for most cases, couples should request a Qualified Domestic Relations Order (QDRO, pronounced “quad-drow”) to achieve the transfer.
What Is A QDRO?
A QDRO is a judicial order directing a retirement plan administrator to transfer all or part of a qualified retirement asset to an ex-spouse. ERISA defines “qualified” as an employer-sponsored plan, like a 401(k). Since an ex-spouse is not an employee at the same company, he or she is not entitled to the same favorable tax treatment. But ERISA provides an exception in the case of a divorce, providing the ex-spouse with the same tax treatment that his spouse enjoyed in the retirement account.
Couples negotiate the terms of a QDRO during their divorce resolution. A lawyer prepares a QDRO according to the negotiated terms, and submits it to a judge. The judge signs the QDRO, directing a retirement plan adminstrator to transfer all or part of the retirement asset to an ex-spouse. The parties serve (send a copy to) the plan administrator, who then effectuates the transfer. The receiving spouse may elect to open a new account or designate a roll-over account to accept the funds.
Typically, plan administrators charge a fee to process the QDRO and make the transfer. Couples should budget about $1,000 – 1,500 between hiring an attorney and paying the plan administrator’s processing fee.
What are the terms of the QDRO?
QDROs must include six key terms.
- the spouse who owns the account (known as the plan participant).
- identification of the plan subject to transfer.
- the ex-spouse who will receive the funds (the payee).
- the plan administrator for the retirement account (not always the same as the financial institution holidng the account).
- either an amount or a formula/percentage to divide.
- the timing for the transfer (usually immediately or upon retirement).
Earlier, we discussed dividing accounts on an “if as and when” basis. Couples split their accounts in an amount, and a time, to be determined, and usually upon retirement. Couples use this method typically in dividing a pension account, where the amount of the payment depends on various inputs.
While there is some cost to dividing retirement assets via QDRO, a knowledgable attorney/mediator will ensure a fair and smooth division.