This Week’s Blog by Lauren M. Healy
Retirement accounts are considered marital assets in Connecticut, and unless there is a prenuptial or postnuptial agreement that provides otherwise, retirement accounts will be allocated between the parties as a part of a divorce. Even if a retirement account is titled in the name of one spouse, or is an employer-sponsored plan, it may still be divided between the parties. Whether a retirement account is actually divided, or allocated in some other way, depends on the type of account. Here are the questions that need to be answered in order to determine how retirement accounts can be divided in your divorce:
Is it a Qualified Plan?
Most, but not all, retirement plans are “qualified” plans. The Employee Retirement Income Security Act (ERISA) provides guidelines regarding retirement accounts, regarding participation, vesting, benefit accrual and fund information. When a retirement plan meets ERISA guidelines, it is considered a “qualified” plan, and is eligible for certain tax benefits. The most common types of qualified retirement accounts are 401(k)s, 403(b)s, SEP-IRAs, profit sharing plans, and certain pension plans.
When you are getting divorced, it is important to know whether a retirement account is a qualified plan because if it is, the account can be divided via a Qualified Domestic Relations Order.
What is a Qualified Domestic Relations Order (QDRO)?
A Qualified Domestic Relations Order (QDRO) is a Court Order that instructs a retirement plan administrator how to divide a retirement account between parties. If a retirement account is a qualified plan and can be divided by QDRO, the retirement account is capable of being separated between the parties without penalty. This is preferable because the non-employee spouse’s share can be deposited into a separate account, allowing for each party to manage his or her portion of the retirement funds individually.
Most divorce decrees will set forth the specific division of the retirement account that is agreed upon by the parties (or ordered by a Judge after a divorce trial), and provide for the parties to jointly hire an individual whose expertise is in the drafting of QDROs to prepare the QDRO and submit it to the Court for approval. Once approved by the Judge, the QDRO will be sent to the retirement plan administrator to effectuate the division of the account.
What if the Retirement Account Cannot be Divided by a QDRO?
Certain retirement accounts, such as IRAs, cannot be transferred by QDRO. However, IRAs can typically be divided in a much easier manner- using a process known as a “transfer incident to divorce.” Also called an IRA “rollover,” this process does not require a separate Court Order, and can be accomplished by the parties themselves without the need to hire a special lawyer. Like a QDRO, an IRA rollover transaction is not subject to taxes. Instead, each party is responsible for payment of taxes on the distributions from the retirement account after the funds are divided between them.
What Happens if we Have Non-Qualified Retirement Accounts?
If you have non-qualified retirement accounts, such as certain deferred compensation plans, executive bonus plans, or annuities, the accounts are typically not capable of being divided between the parties. In order to allocate the asset between the parties, a buy-out or a sharing of the distributions if, as, and when the employee spouse receives them may be the best option.
The attorneys at Broder & Orland LLC are experienced with the intricacies of dividing all types of retirement accounts and can help you take the appropriate legal steps to protect your rights to retirement accounts in your divorce.