Dividing the Nest Egg in Divorce
Dividing Pension Plans in a Mississippi Divorce
Two major concerns arise when dividing pension plans benefits governed by ERISA. First is whether the pension plan administrator will follow the directives of the divorcing spouses. The second is how can the transfers take place without the recipient spouse being taxed by the IRS for an early withdrawal.
Assuming the husband's retirement account (using our previous example) is controlled by ERISA (which controls most private employer accounts), the retirement plan administrator will require a Qualified Domestic Relations Order (QDRO) before he will divide the benefits. ERISA prohibits state laws from interfering with ERISA plans. An exception created by Congress is the QDRO. A QDRO is a judgment, decree, or order issued by a state court which:
- Recognizes someone other than the plan participant has right to receive benefits from the plan;
- Relates to payment of child support, alimony, or marital property rights to a spouse, former spouse, child, or other depending of the plan participant; and
- Specifies certain information required by the law.
With a QDRO, divorcing spouses can divide retirement plan benefits. However, there are issues that may arise other than the simple formula of how much each party gets. Some are:
- How is the benefit the non-employee spouse receives valued when the employee spouse continues working past the date of divorce?
- Is the non-employee spouse entitled to future benefits?
- With a defined benefit pension plan, what if the employee spouse dies before the benefit starts paying? How can the non-employee spouse protect their interest?
- With a defined benefit pension plan, what if there are costs of living adjustments after the date of divorce? How are they shared?
- What if the non-employee spouse dies before the employee spouse? Who gets the benefits assigned to the non-employee spouse?
- Can the ex-spouse get the survivor benefits under the retirement account?
- With a defined contribution plan, how can the non-employee spouse ensure their portion is not taxed when it is divided?
- Would the non-employee spouse be better off to negotiate a cash settlement with their spouse and allow the employee spouse to keep their retirement benefits?
- How do you divide vested v. non-vested benefits?
These issues, and many more, are not something for the layperson to tackle on their own. You need help from an experienced family law attorney in this area.
The second major issue is ensuring that any division/distribution of account benefits does not end in a tax penalty to the recipient spouse. The key is not to be penalized for an early withdrawal by dividing the account. A misstep here could cost you serious money. Thus, consulting a professional is essential.
These are just some of the issues couples encounter when dividing a retirement account in a divorce. Drafting a QDRO is not something you want to try on your own. It is not a DIY project. You need a qualified professional to draft the QDRO to ensure the plan administrator follows your wishes as well as ensuring the negative tax implications are minimized. Contact an attorney to assist you. In my next post, I will discuss two cases that emphasize the pitfalls of not having an approved QDRO.
