Because of California’s community property laws, your retirement plan is also your spouse’s retirement plan. If your spouse has a plan of their own, part of it belongs to you. Everything you earned during your marriage, including employer contributions to your plans and interest earnings over time, is considered community marital property. Both spouses own an equal share.
Amounts you accrued before you got married may be considered your separate property, but unless you had a pre-or postnuptial agreement specifying that retirement benefits would remain as one spouse’s separate property, then you share your interests in both spouse’s plans. Chances are the amounts in the plans are not exactly equal, so one spouse will be receiving funds out of the other’s retirement plan. This can be complicated and requires special handling.
If your divorce attorney is experienced in handling complex and significant assets, they should understand the specific needs and be able to guide you through the process. At Holstrom, Block & Parke, APLC, our Certified Family Law Specialists and associates protect our clients’ interests in retirement plans regularly. But if your attorney is not comfortable with the process or you’re looking for background information, here are the basics.
What Makes Retirement Plans So Complicated
Unlike dividing up funds in a checking account, the process of dividing benefits in a retirement plan involves a lot more issues. You need to understand not just the value on the books today, but also the potential future value and tax consequences. In addition, the companies that manage retirement plans require your legal team to jump through some extra hoops before they will release funds to someone other than the employee who earned the benefits.
The types of retirement plan benefits can vary widely. Sometimes benefits may be accrued but not fully vested, which means the employee might only have the right to a percentage of those benefits if they were to leave today employment, but at some point in the future, they will have full right to those accrued benefits.
When a retirement plan is considered “qualified,” that adds another layer of complexity. The federal Employee Retirement Income Security Act (ERISA) allows certain plans to be funded with pre-tax dollars and these must be managed carefully in divorce to avoid triggering an immediate bill for the deferred taxes. Plans such as 401(k) plans, profit-sharing plans, 403(b) plans, and Keogh plans are considered qualified plans. You generally need a special type of court order to divide qualified retirement plans in divorce.
Obtaining a Qualified Domestic Relations Order (QDRO)
A domestic relations order from the court is usually required before the administrators of a retirement plan will hand over funds to a spouse in divorce. When you are dealing with assets in a qualified retirement plan, you also need a Qualified Domestic Relations Order or QDRO. This is a specialized document that must contain certain features to meet government requirements. Once the QDRO is prepared to incorporate the legal terms and explanations of the assets involved, then the order is presented to the court. If the judge approves, it will be signed and the spouse obtaining the distribution will present the QDRO to the retirement plan administrator. Then the plan itself needs to approve the QDRO. The bottom line is that it takes considerable time and effort to obtain funds from a qualified retirement plan. If the terms of division in the divorce decree do not align with options offered by plan administrators, then it may be necessary to redraft the order, which will further delay payment and add to the expense.
In some cases, the plan administrator actually needs to be added as a party to the divorce through joinder before a QDRO can be established, which adds still further delays. Finally, when all is complete and funds have finally been released, the spouse receiving funds from a qualified retirement plan may need to be prepared to take quick steps to reinvest the funds appropriately to avoid a tax bill.
Protect Your Interests in Retirement Assets by Working with the Experienced Team at Holstrom, Block & Parke, APLC
Retirement assets are one of if not the most significant source of assets for many couples facing divorce. You don’t want to risk losing out on any value that should rightfully be yours, and you don’t want to waste resources on administrative mistakes. The skilled team at Holstrom, Block & Parke understands how to handle and divide retirement assets of all types, including qualified retirement plans. Schedule a consultation with our team today to learn about the protection we can provide in your particular situation.
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