Dividing Retirement Plans & IRAs in Divorce
In many divorces, retirement plans are the parties’ most significant assets; therefore, experienced divorce lawyers should be consulted. Divorce attorneys must understand the basics of retirement plans so that they can properly represent their clients throughout the divorce process. Further, they must take the time during the initial stages of the divorce to get the information that they need about the parties’ benefits. Many of the most common errors stem from a misdirected effort to save money for clients on tight budgets. This is an area where it is very easy to accidentally cost your client a fortune while trying to save him a few hundred dollars. The issues addressed here arise frequently, but there are simple ways for attorneys to protect their clients and themselves. With attention to these few important issues, attorneys can go a long way toward peacefully and successfully dividing retirement benefits, even in the midst of economic uncertainty.
IRAs and Non-Qualified Plans
A. IRAs
Contrary to popular belief, you do not need a QDRO to divide an Individual Retirement Account (IRA). IRAs are not subject to ERISA. The provision for the tax-free transfer of IRA funds in connection with a divorce is found at 26 U.S.C.A.§ 408(d)(6). A transfer may be made to a spouse or former spouse under this section if it is pursuant to a decree of divorce, or a written instrument incident to a divorce. The “written instrument” can be a separation agreement connected to a divorce, or a decree requiring payment of support to a spouse or former spouse.
A letter of instruction and copy of the Final Judgment and/or Settlement Agreement should suffice to transfer funds from an IRA in a divorce case. Many financial institutions that sponsor IRAs have simple forms to fill out that will effectuate the tax-free transfer of funds in connection with a divorce. This is known as a “trustee-to-trustee transfer,” and it should not result in tax consequences to either party, if it is clear that the transfer is incident to a divorce.
B. Non-Qualified Plans
Attorneys often learn the hard way that some plans are simply not divisible by QDRO. There are a lot of retirement assets out there that do not fall under ERISA and just cannot be divided in a divorce. Many companies offer non-qualified retirement benefits to highly paid employees, which allows them to provide these employees with additional retirement benefits beyond those permitted under the tax provisions of ERISA. Non-qualified retirement plans are common for high-ranking employees, and they can almost never be divided or assigned to anyone other than the employee.
Non-qualified plans usually have terms in their names such as: a)Supplemental; b)SERP: c) Non-qualified; d) Excess Benefit. Plans with these terms in their titles are usually not qualified and will not accept a QDRO. These plans normally contain provisions which specifically prevent them from making payments to anyone other than the employee, and thus there is no way for the plan to make payments directly to a former spouse, regardless of what any court orders the plan to do. A very small, but growing, number of non-qualified retirement plans will accept a Domestic Relations Order (not a “QDRO”) which provides for payments to be made to a former spouse.
C. Government and Other Non-ERISA Retirement Plans
There are several other types of retirement plans that are also not subject to the QDRO rules of ERISA. Government plans are exempt from ERISA. The federal government’s three main retirement plans (the Thrift Savings Plan, Federal Employees Retirement System (“FERS”), and Civil Service Retirement System (“CSRS”)) are divisible, but not by any document called a “QDRO.” These plans have their own mechanisms for division, which include specialized terminology. The State of Alabama usually refuses to divide their plans by QDRO or other means.
