How Are Retirement Accounts Divided in Divorce?

Retirement plan with calculator pen and glassesDividing assets in a divorce or dissolution is often challenging. Sometimes the issue is that both spouses want an item that is unique or has sentimental value. Other times, there may be a question about whether an asset is marital property that is subject to division in divorce, or separate property that belongs to one spouse. And some assets are hard to divide because it is difficult to determine their value. 

One of the most challenging types of assets to divide in divorce are retirement accounts, which have several problematic features. They are almost always acquired over time, which means they may be partly marital property, and partly separate property. They have a different value in the present than they will when the funds are taken out in the future. And they may be the largest asset that a couple has to divide in a divorce, especially if the couple is divorcing later in life

It comes as a rude shock to some people to learn that “their” 401(k) or pension isn’t exclusively “theirs,” even though they earned it as part of their job. In Ohio, as in most other states, most assets acquired during a marriage are considered marital property, no matter who earned or acquired them. Let’s take a look at the different types of retirement assets, how retirement assets are divided in divorce, and what it all means for your future. 

IRAs, Pensions, 401(k)s and Divorce in Ohio

First things first: how retirement benefits get divided in an Ohio divorce depends on whether they are provided by an employer. Accounts provided by an employer are subject to federal law, specifically the Employee Retirement Income Security Act, better known as ERISA. ERISA governs the division of employer-provided retirement benefits in a divorce. 

Employer-provided retirement assets fall into two categories. The first is defined contribution plans, such as 401(k)s, 403(b)s, employee stock ownership plans (ESOPs), and profit-sharing plans. As the name suggests, a fixed amount is contributed to these plans on a regular basis. Pensions, on the other hand, fall in the second category: defined-benefit plans. As you might guess, these plans are called “defined benefit” because the regular payments from the plan are a fixed, or defined, amount. 

Whether they are defined contribution plans or defined benefit plans, retirement accounts governed by ERISA must be divided using a qualified domestic relations order, or QDRO, which we will discuss further below. 

What about Individual Retirement Accounts (IRAs) and Roth IRAs? Do they need to be divided by QDRO? No, for the simple reason that they are not employer-provided plans, and are not governed by ERISA. That doesn’t mean that there are no complexities involved in dividing them, simply that a special, separate court order isn’t necessary to do so. 

Understanding the QDRO Process in an Ohio Divorce

A divorce decree or separation agreement adopted in a divorce or dissolution decree is the “private law” of the divorcing couple. It tells them what their rights and responsibilities are with respect to each other. But a decree cannot govern the actions of a third party—like the administrator of a retirement plan. So the decree does not divide the retirement assets. Rather, it describes how the benefits are to be divided, and directs the parties to obtain a QDRO which actually divides the assets. 

The QDRO process requires one of the parties’ attorneys, or a professional QDRO preparer, to draft an order specifying how and when the retirement account or asset will be divided and paid, what happens in the event of the death of one party, and other details. The preparer of the QDRO may request a sample document from the plan administrator to make sure the QDRO complies with the plan’s specific rules.

Once the QDRO is drafted, the ex-spouses will review it to make sure it reflects their agreement. Then it is sent to the retirement plan administrator. Once the plan administrator gives preliminary approval of the QDRO, the parties sign it and it is sent to the judge for signature. After the judge approves and the QDRO is made a court order, a certified copy of the signed QDRO is sent to the plan administrator, and the plan administrator implements the order. Some plans wait until after the expiration of a brief period for comments or appeals before actually dividing the plan’s assets between the ex-spouses. Plan Administrators may also reject QDROs if some detail is missing or if the plan provisions will not honor the terms of the QDRO.

If the retirement asset divided by QDRO is a defined contribution plan, the person who is not employed by the plan provider may have to, or may choose to, move the funds to another qualified plan by rollover.  If the retirement asset divided by QDRO is a defined benefit plan, the pension will be paid out when age and service eligibility criteria are met. Different plans have different provisions in case one of the former spouses dies before the pension begins to make monthly payments.

This may all sound very straightforward, but this process can take months, and a breakdown at any step can mean that a retirement benefit does not get divided as it was supposed to be. That can mean that you lose access to the money you were counting on to support you in retirement. 

Tax consequences concerning retirement assets must also be considered before withdrawing ERISA retirement funds or funds from an IRA.

An experienced Ohio divorce attorney can take steps that the QDRO process doesn’t get stalled, that nothing falls through the cracks, and you have proper guidance through the tax laws. If you have questions about dividing retirement assets in divorce, what constitutes marital and separate property, how QDROs work, or any other concerns about asset division in an Ohio divorce, we invite you to contact Graham-Hurd Law to schedule a consultation to discuss your particular situation and how we might help.