For many divorcing couples in Connecticut, retirement assets — such as 401k plans, pension plans or IRA accounts — represent a substantial portion of the marital estate. This tends to be especially true in marriages of long duration. Accordingly, it is not surprising that many of our clients express concerns about whether they will be entitled to share in retirement assets that are titled in their spouse’s name and, if so, what this will look like. Just like assets such as bank accounts, real estate, cars or jewelry, retirement assets are a form of property that can be divided at the time of a divorce. In fact, the division of retirement assets is often a critical component of a divorce settlement or divorce decree.
As an initial matter, it is important to understand that many different kinds of retirement assets exist, and that they are all divisible in a divorce in one form or another. The focus of this article, however, is on employer-sponsored “qualified” retirement plans, which are retirement plans that are afforded special favorable tax treatment because they satisfy certain federal requirements. Common examples of qualified retirement plans that may comprise part of a marital estate are 401(k) plans or pension plans. Fortunately, for divorcing couples, there is a mechanism called a Qualified Domestic Relations Order (commonly referred to as a “QDRO”), pursuant to which qualified retirement plans may be divided between divorcing spouses (whether at a 50/50 allocation, or otherwise) without these funds losing their favorable tax treatment and without application of any early withdrawal penalties. In short, a QDRO is a judicial order that assigns to the non-titled spouse (referred to as the “Alternate Payee”) the right to receive all or a portion of the benefits payable to the titled spouse (referred to as the “Participant”) under a qualified retirement plan.
To better understand how you might be impacted by a QDRO, it is also important to understand the distinction between two categories of qualified retirement plans; “Defined Contribution Plans” and “Defined Benefit Plans.” Defined Contribution Plans are savings plans that typically exist in the form of an investment account, such as a 401(k) plan, 403(b) plan, or an Employee Savings Plan. In contrast, Defined Benefit Plans are traditional pension plans which typically provide retirees with a pre-determined monthly retirement benefit often payable to the employee upon attainment of their normal retirement age for the remainder of his or her lifetime. The amount of the monthly benefit is usually calculated by a formula that takes the employee’s number of years of service and his or her salary prior to retirement into account. The distinction between these two types of qualified plans is important, because it will determine the manner in which the Alternate Payee’s portion of the asset will be distributed to him or her.
As discussed above, Defined Contribution Plans exist in the form of an investment account and therefore have an ascertainable present value. Accordingly, whatever portion of these funds are to be allocated to the non-titled spouse can be paid to that spouse in a single lump sum that can (and should) be rolled over into another qualified retirement plan or IRA in the Alternate Payee’s name so as to avoid early withdrawal penalties. In contrast, in the case of a Defined Benefit Plan, the Alternate Payee is typically not able to receive a lump sum cash payment from the Plan. Rather, whatever amount is to be distributed to the Alternate Payee will typically be distributed in the form of a monthly benefit payable for either the lifetime of the Participant or the Alternate Payee. (Note: transferring or dividing a traditional or Roth IRA in a divorce does not require a QDRO; the division can be effectuated by a simple “IRA to IRA” transfer).
As top divorce attorneys in Greenwich, Westport, Stamford, Darien, and New Canaan will tell you, a well-crafted divorce settlement should specifically address all retirement assets owned by either party and, in particular, should contain detailed provisions regarding any QDRO’s that need to be prepared and submitted to the Court for approval. At Broder Orland Murray & DeMattie LLC, we are experienced at negotiating comprehensive settlements that ensure that you will receive your fair share of all retirement benefits that comprise part of the marital estate, regardless of whether you are the titled or non-titled spouse.