When you get divorced, it's important to make sure the property settlement is fair. An important part of this process is dividing retirement accounts.
A procedure called a qualified domestic relations order (QDRO) can be a key tool in making this happen. A lawyer experienced in Michigan marital property and debt division issues can help you determine what role a QDRO could play in your particular case.
Types of Retirement Accounts
Retirement account balances took a big hit in the Great Recession. But they remain the most significant source of savings for many Americans, especially with the decline in home prices.
According to the U.S. Department of Labor, more than 46 million private sector workers are covered by employer-provided retirement accounts. There are also many military and government workers covered by various public sector plans.
For private sector workers, a federal law dating to 1974 sets the structure for what types of accounts are available. This law is widely known by its acronym: ERISA. This stands for the Employment Retirement Income Security Act.
Increasingly, the most common type of account made possible by ERISA is a 401(k). Workers can elect to contribute part of their earnings into an account, and will not be taxed on it until the money is withdrawn in retirement. Employers can choose to assist by matching employee contributions up to a certain percentage.
A defined-contribution plan like this is a quite different arrangement than the traditional defined-benefit pension plans that many employers used to offer. Those plans were typically funded by employers and promised employees certain amounts based on years of service, if the employee put in enough years to have those benefits become "vested."
This older, employer-driven system, however, has largely given way to a new retirement-planning regime in which each employee must be the principal planner of his or her own retirement. Employers have passed that ball to employees. Yes, Social Security is still around - but it only takes you so far.
What is a QDRO?
Let's suppose divorce proceedings are underway and one spouse has a large retirement account through an employer. It could be a 401(k), or maybe it's a Roth IRA or some other type of account.
The main thing is that, for the account to be divided in a divorce property settlement, there has to a legal mechanism to allow this. That mechanism is called a qualified domestic relations order. Like ERISA, it is usually known by its acronym: QDRO (pronounced "quad row").
A QDRO is a court order that assigns an interest in someone's retirement account to a spouse, former spouse, child or other dependent. In practical terms, it instructs a pension plan to pay out a certain amount of money from the account to meet the primary account holder's obligations to pay alimony or child support, or to resolve a marital property settlement agreement.
In other words, a QDRO is a way of getting at the retirement money that one of the spouses has accumulated. This can only be done, however, by following detailed rules under state and federal law.
Keep in mind, for starters, that a QDRO is not available for government or military retirement accounts. Though it may be possible to divide those accounts, the applicable law for public sector workers is not ERISA. Only retirement accounts that are tax-qualified under ERISA are eligible for a QDRO.
The "Q" in QDRO also refers to another sense of being qualified: namely, that the domestic relations order has been approved both by the court and by the administrator of the relevant retirement plan.
Determining the Amount
Once the qualifying considerations are established, the question becomes one of determining the value of a QDRO interest. This may involve making an actuarial calculation, because some plans may be willing to make a lump sum payout. Others, however, may pay a lump sum down the road, at a given future date. A third possibility is making period payments at designated intervals.
Which one of these options is preferable in your divorce may depend on several factors. One, quite simply, is what a given plan allows. Another is the actuarial calculation itself, based on the time value of money. There is also a subjective aspect to this: How much is it worth to get the money now, rather than having to wait? Getting it now, for example, may be better in terms of emotional resolution.
Making Good Decisions
Making good decisions about dividing retirement assets can be hard when you are simultaneously dealing with the emotional challenges of your divorce. Try to keep the focus on your long-term goals - and get the legal advice you need from an experienced family law attorney.