Division Of Retirement Assets In Divorce: Field Guide To QDROs, SEPs, ESOPs, TSPs And Other Beasts

In addition to homes, automobiles, bank accounts and furniture, retirement plans may be “marital property,” subject to an equitable divisionamong the parties to a divorce.

Many twenty-pound books have been written about the methods of valuing, and dividing, retirement interests. In fact, some lawyers make their living handling only the orders associated with slicing and dicing retirement plans, for two key reasons. First, this stuff is rather confusing, even to the most qualified divorce attorneys, making specialization critical. Second, many family lawyers don’t wish to test the strength of their malpractice coverage by lurking in dark places.

A few key terms to understand:

  • Qualified Domestic Relations Orders (QDRO): An order drafted after entry of a divorce decree that splits ownership of a retirement plan. The plan administrator will have sample language to follow. Learn more about Qualified Domestic Relations Orders.
  • Certified Judgment and Decree: A copy of a final divorce decree that contains the seal of the court administrator, validitating authenticity of the decree.

In an effort to help you get your arms wrapped around retirement interests, we offer the following: (1) common plan descriptions; and (2) method utilized to divide them:

  • 401(k) Plan: An employee contributes a percentage of income to the plan, pre-tax. The employer may match the contribution of the employee in part, or full. Withdrawals are taxed as ordinary income. Withdrawal before 59 1/2 usually results in additional penalties. Divided pursuant to a QDRO. Learn more about 401(k) plans.
  • 403(b) Plan: Similar to a 401(k) plan, but offered by public education organizations and other non-profits. Divided pursuant to a QDRO. Learn more about 403(b) plans.
  • 457 Plan: Similar to a 401(k) plan, but offered by some government employers. Divided pursuant to a QDRO.  Learn more about 457 plans.
  • Deferred Compensation: A portion of an employee’s income is paid at a future date, tax-deferred until payment is received. Many municipal employees, such as police officers, participate in deferred compensation plans. Divided pursuant to a QDRO. Learn more about deferred compensation plans.
  • Employee Stock Ownership Plan (ESOP): A portion of the employee’s salary is used to purchase company stock. The company holds the stock, in trust, for the employee. The employee receives cash, or shares, at time of termination of employment. Divided pursuant to a QDRO. Learn more about ESOPs.
  • Profit Sharing Plan: The employer makes a contribution to an employee’s account, if the company yields a profit, based on a formula. Divided pursuant to a QDRO. Learn more about profit sharing plans.
  • Pensions: Arrangement in which a retired employee receives periodic payments from their former employer, whether a private company, union, the military or government agency. Divided pursuant to a QDRO, or non-qualified DRO. Learn more about pensions.
  • Roth IRA: Individuals contribute to an account held in their name, on a post-tax basis. Growth on investment distributed tax free. Divided pursuant to a certified Judgment and Decree. Learn more about ROTH IRAs.
  • Simple IRA: An employee contributes a pecentage of income to the plan, pre-tax. The employer may match the contribution of the employee in part, or full. Similar to a 401(k), but less expensive to administrate. Divided pursuant to a QDRO. Learn more about Simple IRA accounts.
  • Simplified Employee Pension (SEP): An employee contributes a pecentage of income to the plan, pre-tax. The employer may contribute to the plan. Divided pursuant to a certified Judgment and Decree. Learn more about SEP plans.
  • Social Security: Individuals receive periodic payments from the government when they reach a specific age. Benefits are non-marital and, therefore, not subject to division among the parties. Learn more about social security benefits.
  • Thrift Savings Plan (TSP): Defined contribution plan for federal civil service employees. Similar in nature to a 401(k) plan.  Divided pursuant to a QDRO. Learn more about TSP.
  • Traditional IRA: Individuals contribute to an account held in their name, on a pre-tax basis. Divided pursuant to a certified Judgment and Decree. Learn more about Traditional IRAs.

Any number of other plans may be available to a particular employee, but these are by far the most common. If you have a question about another type of plan, such as a deferred annuity, TSA, money purchase plan or SARSEP, I invite you to contact me at your convenience.