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Dividing Pensions in Divorce - Errors Made Can Be Costly!

One of the biggest marital property assets divided in a divorce is the pension. Pension plans (also known as Retirement Plans) fall under two categories: Qualified and non-qualified. Those qualified pension retirement plans covered by the Employee Retirement Income Security Act (ERISA), such as defined benefit plan pensions, defined contribution plans--401(k), 403(b) tax sheltered annuities, thrift savings plans, some profit sharing and money purchase plans, Employee Stock Ownership Plans (ESOPs), Keogh plans as well as the new Single K plans require a Qualified Domestic Relations Order (QDRO - pronounced Quadro) before the retirement plan can be divided. Civil Service Retirement System (CSRS) and the Federal Employees' Retirement System (FERS) are divisible under the Civil Service Retirement Spouse Equity Act of 1984.

The Qualified Domestic Relations Order is a court order signed by the judge that requires the plan administrator to divide the retirement account according to the proportion stated in the order. An expert who specializes in this area should prepare the QDRO. Many attorneys wait until the divorce is finalized before the QDRO is completed. They do not realize that if the QDRO is not in place when the couple divorce, the non-employee former spouse no longer has rights to the pension, thereby, placing their client in jeopardy, as well as setting themselves up for a malpractice law suit. For example, if the employee dies after the divorce, and since there is no QDRO in place, the non-employee spouse will lose their interest in the retirement. Therefore, if the employee had remarried, the new spouse would receive all of the survivor benefits. More importantly, what if the QDRO was in place, what would happen to the alternate payee if the participant dies before payments begin? The surviving spouse is entitled by law to receive a Qualified Pre-Retirement Survivor Annuity if the participant dies before payments begin, so the only way to provide a survivor annuity for the alternate payee is to have it written in the QDRO.

Other errors that can be costly to the non-employee spouse is that other retirement plans held by the employee spouse were not identified during the discovery process due to the attorney's ignorance or sloppiness, which happened in one of my cases. As the Certified Divorce Planner on the case, I discovered it and brought it to light so it could be evaluated for marital distribution. Other common errors are that often some attorneys may request a lump sum when it is not provided for in the plan. It is extremely important to know what type of plan the employee spouse has, how it is funded, and how it pays out. This information can be found in the employee Retirement Plan Summary Plan Description booklet. It is in here that you can find if the employee receives an early retirement bonus. This also needs to be taken in consideration to negotiating for a portion of it or not dividing it in exchange for some property.

Whenever possible, the QDRO should be pre-approved by the Plan Administrator before it goes before the judge for signing along with the final divorce decree.

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