Retirement Division Options For Divorce
By: Kate Haakonsen
Retirement plans and accounts are often the most valuable assets couples have accumulated during their marriage. Connecticut considers retirement assets to be assets available for division at the time of a divorce or after even though these assets are owned in the name of only one spouse.
Most, but not all, retirement assets can be divided at the time of a divorce without incurring penalties or taxes. Traditional pensions, known as defined benefit plans, and qualified savings plans are typically divided using a special order known as a Qualified Domestic Relations Order (QDRO) which is permitted under federal law. These orders apply to so-called “qualified” plans including 401(k)s, 403(b)s, 457 plans and many defined benefit plans created under IRS rules. IRAs can also be divided at time of divorce but a QDRO is not required. State of Connecticut and many municipal retirement plans can be divided, although they are not technically considered “qualified.” So can many annuities and some deferred compensation plans. But “non-qualified” plans often offered to highly-compensated employees cannot usually be divided between spouses so other provisions need to be made in a settlement agreement.
When considering your options for dividing retirement plans, it’s important to understand all the terms and conditions of each plan and how a former spouse will be treated under the plan. Issues to consider when dividing pensions are whether the plan include cost of living increases, when a former spouse will be eligible to receive a benefit and the impact of the death of either spouse before or after the benefits have commenced. Not understanding the terms of a plan could lead to the loss of an expected benefit.
Even when the goal is to divide the total assets of the couple, it is not always necessary to divide each and every asset or plan. Sometimes it makes more sense to assign certain plans to each party and divide only one or two plans in a manner which achieves the desired distribution. This can both avoid the difficulties of dividing certain types of plans and save money on the number of QDROs which need to be prepared.
When dividing savings plans like 401(k)s, 403(b)s, 457 and IRAs, it is important to pay attention to the effect of fluctuations in the stock market on the values of the plans and craft an agreement which protects both parties from the impact of those until the divisions are finalized. You may want to take advantage of an exemption from the early withdrawal penalty for a former spouse receiving funds from a qualified plan.
As you can see, this is a technical area of the divorce process. It’s a good idea to work with knowledgeable professionals when making these kinds of decisions. What you don’t know can lead to very expensive errors.