Retirement plans are often some of the most valuable assets that a couple can accumulate during their marriage. They are, however, considered marital property and are split during divorce. These accounts may have accumulated savings throughout decades, and even if the plan belongs to only one spouse, the other spouse may be entitled to half the value under California's Community Property Law.

However, splitting such plans is not always as simple as saying one spouse gets a specific share. Most employer-provided retirement plans will need a QDRO (Qualified Domestic Relations Order) before any payments will be made to the ex-spouse. Learning about QDROs can help Sacramento residents preserve their valuable retirement plans.

Retirement benefits and California community property

California recognizes community property. Under our state law, assets or earnings obtained during the marriage and until separation are considered community property. Assets earned before the marriage or after separation are considered separate property of the individual spouses. 

This law also applies to retirement benefits. As California courts have stated, retirement and pension plans can include both community and separate property. For instance, if an individual started contributing to their retirement plan before the marriage and continued contributing during the marriage, only a portion of that account will be part of the marital estate.

In case of pensions and other defined-benefit plans, determining the community interest becomes more difficult. Instead of merely considering the account's value, you must calculate how much of the benefit was earned during the marriage.

What is a QDRO?

A QDRO is a legal term for a court order that separates specific retirement benefits between parties. It orders a retirement plan to treat a specific person (referred to as an alternate payee) as a recipient of some of the total benefit payments. 

Under federal law, any QDRO must include information such as the names of the participant and the alternate payee, as well as the portion or percentage of benefits awarded to the alternate payee. Moreover, a QDRO cannot obligate a retirement plan to pay benefits or options that are unavailable within the plan.

A divorce order is not necessarily a QDRO, since it only indicates one spouse's right to share the other spouse's benefits. However, an ERISA-governed retirement plan cannot pay the benefits until the plan receives a QDRO from the US Department of Labor.

Which retirement plans require a QDRO?

QDROs are often linked with employer-sponsored retirement accounts such as:

• 401(k)s

• 403(b)s

• profit-sharing plans

• private pension plans

However, not all retirement accounts use a QDRO for division. For instance, IRAs usually don't need a QDRO for transfer. This means a transfer can be made between spouses and former spouses if it is made under a divorce decree or separate maintenance decree or another qualifying written instrument. 

Sometimes, government retirement plans have specific regulations and procedures to follow. For example, CalPERS has its own procedure for dividing pensions after divorce, which includes a preliminary review of proposed domestic relations orders.

Because different types of retirement accounts have different regulations, you need to understand all of them before deciding on the distribution method.

A QDRO should be addressed early

A costly mistake that some people make is treating the QDRO as simple paperwork to fill out months or even years after divorcing. 

The Department of Labor advises people to collect information about retirement plans early, rather than at the end of the divorce proceedings. The plan administrator must determine whether the domestic relations order qualifies under the requirements and, if the language contains errors, whether modifications are needed. 

For pension benefits, early action is crucial since you must consider not only how monthly payments will be distributed, but also survivor benefits if death occurs during or before retirement. 

Hence, the wording of the divorce agreement and the retirement order must work hand in hand. Failing to resolve all issues at once may lead to disputes later on.

QDROs can have important tax consequences

Be careful about the tax implications of retirement assets.

The individual who qualifies for a QDRO distribution can use those assets to roll over into an IRA account or a qualified plan. According to the IRS, any payments made under a QDRO are treated as part of the former spouse's income unless they are properly rolled over. A qualifying QDRO distribution of retirement assets is not subject to 10% additional tax on early distribution.

However, this does not mean every way of withdrawing money from retirement accounts has the same tax consequences. Withdrawing funds instead of transferring or rolling them over can lead to a large tax bill. Spouses must consider the after-tax value of retirement assets when dividing their property.

Do not forget about beneficiary or survivor rights

Beneficiary designations and survivor benefits may also be affected by divorce.

You may need to change the beneficiary designation form after a divorce. However, simply changing the beneficiary designation will not necessarily solve all issues related to a retirement plan. A QDRO or similar order will determine the rights at issue.

It is advisable to speak with the employer or plan administrator about beneficiary designation after a divorce. It is recommended to discuss survivor benefits of a pension plan while negotiating a settlement agreement.

Protecting retirement assets in a Sacramento divorce

Retirement plans can seem simple on a financial statement, but separating them properly may require cooperation among spouses, lawyers, courts, and retirement plan administrators. Matters get even more complicated when the benefit was earned not only before but during the marriage, or when there are several plans or survivorship rights in a pension.

Divorcing individuals in Sacramento must understand the importance of locating retirement benefits early in the process. A seasoned California family lawyer can help calculate the community property share of the benefits, negotiate their distribution, and ensure proper drafting of a QDRO or other retirement order under the divorce agreement. 

Handling these questions correctly during the divorce will save people decades of doubt and ensure that benefits ordered by the judge are actually distributed.

Talk to a Sacramento, CA, Divorce Lawyer Today

Wagner Family Law represents the interests of Sacramento residents during their divorce. Call our office today to schedule an appointment, and we can begin discussing your case right away.