Dividing Retirement Plans in a Divorce
Often, some of the largest assets that need to be divided in a divorce are retirement plans including IRAs, 401(k)s, pensions and similar. In Minnesota, property either spouse acquires during the marriage (with limited exceptions) is marital property and is considered to belong to both spouses. That means that even a spouse's retirement account earned during marriage can be divided.
Unfortunately, unlike dividing a simple bank account, dividing retirement plans in a divorce is more complicated. In some cases, dividing a retirement plan requires a separate Order. Also, if one party started earning contributions to an account or plan before the marriage, the asset will be partly marital and partly nonmarital property — and figuring out the relative proportions can be challenging. Furthermore, placing a valuation on a defined benefit plan like a pension requires additional expertise.
Not All Retirement Accounts Are Divided the Same Way in Divorce
Retirement plans that are "qualified plans" under the Employee Retirement Income Security Act and its amendments (ERISA) are divided differently from those that are not. How do you know if you have a qualified plan? Qualified plans include "defined contribution" plans like:
- Profit sharing plans
- 401(k) plans
- 403(b) plans
- Simplified Employee Pensions (SEP) Plans
- Savings Incentive Match Plans for Employees of Small Employers
- Employee Stock Ownership (ESOP) Plans
Defined benefit plans, like pensions, may also be ERISA qualified.
Qualified plans must be divided using a Qualified Domestic Relations Order, or QDRO (pronounced "quad-ro"). Your divorce decree may state that "such-and-such retirement plan will be divided between the parties pursuant to a QDRO," but that is not sufficient to actually divide the plan. The QDRO must be separately prepared, signed by the judge in your case, and submitted to and accepted by the company administering the retirement plan.
Because they have to comply with both federal regulations and company requirements, QDROs are complex. You need the help of an experienced attorney to ensure every step in the process is completed properly. Otherwise, you could encounter a surprise years down the road when you attempt, without success, to collect benefits.
What plans are not considered "qualified" and do not require a QDRO for division? The most common are IRAs. Transferring an IRA after divorce is simpler than dividing a qualified plan, but there is still the potential for unforeseen results if it's not done properly. The transfer must be made after the divorce is final (preferably soon after), and should be made from the trustee of the original account to the trustee of the recipient's account. If the ex-spouse receiving the funds is simply given a check, the transferring ex-spouse could be hit with taxes and penalties. Again, it's best to have an attorney manage this process.
Advice for Valuing and Dividing Retirement Plans in a Divorce
The complexity of dividing retirement accounts may tempt you to say, "I'll just keep my accounts, and my spouse can keep theirs." That may be an option if you are both employed, with accounts of similar value, but that's often not the case. It's worthwhile to take the time to discover what accounts your spouse has and what they are worth. This takes place through the discovery portion of a litigated divorce, or through mutual disclosure in a collaborative divorce.
You and your spouse may decide to each keep your own accounts. You may decide to divide all accounts equally. You may decide that one spouse gets their account, and the other gets an equal amount of other property. Whatever choice you make, do it only with full information and with legal representation. Don't try to save on attorney's fees when dividing retirement plans. Doing so could cost you much more than you saved.
If you'd like to learn more about how an attorney can help you identify, value, and divide retirement plans in your Minnesota divorce, we invite you to contact Bloch & Whitehouse, P.A. at (952) 224-9977 to schedule a free initial consultation.