Dividing Retirement Accounts During an NC Divorce

Simply put, any asset or liability that was acquired during the marriage is considered marital property, and must be shared by the parties upon the dissolution of the marriage. Everything will be divided, from bank accounts and personal property to time-shares and even frequent flyer miles. Your retirement is not exempt from this.

Keep in mind, however, that retirement earned prior to the date of marriage isn’t marital. Retirement earned after the date of separation isn’t marital either. The only portion of your retirement subject to division is the portion earned during the marriage.

Yes, your spouse could in fact take a portion of your retirement account that is greater than 50%. There are several scenarios that could point to this sort of a distribution.

First, while there is a preference in North Carolina for property to be divided on a 50/50 basis, there are many factors that a judge can consider that may result in an unequal division.

Another reason why your spouse may end up taking a larger portion of your retirement is because the other marital assets at play are either insufficient or unavailable. Perhaps you are splitting your assets on a 50/50 basis, but a large portion of your assets is a business interest that you aren’t willing to sell, you may opt to assign a larger portion of your retirement account to your in order to effectuate a 50/50 split without liquidating your business interest.

Yes. If you are able to address your equitable distribution issues through a separation agreement, the agreement can be molded to best suit you and your former spouse’s needs. You may prefer to each keep your retirement plans in tact, and offset what you may owe by trading other assets.

Or, you may simply agree to not even include your retirement savings in your equitable distribution calculation, opting to just each keep your own account. This approach is usually ideal when parties have comparable retirement plans, or in cases where the retirement saving is rather minimum. If one spouse has a significantly larger retirement account, or a substantial balance invested in a retirement plan, that asset will most likely not be simply ignored by the other spouse during equitable distribution.

QDRO is shorthand for “Qualified Domestic Relations Order,” the legal instrument that allows for a person to assign rights in a retirement account subject to ERISA to another person. If you are splitting a 401(k), pension, or other qualified plan you will need to obtain a QDRO in order to access the funds without incurring a tax penalty. Simply making a withdrawal from such a plan incident to divorce would trigger a tax event. A QDRO avoids this problem.

A QDRO will need to contain specific language instructing the plan administrator as to how the funds should be dispersed. At a minimum, as mandated by ERISA, the QDRO will require:

• The name of the plan
• The name and last known mailing address of the participant
• The name and mailing address of the participant
• The name and mailing address of the alternate payee (spouse of employee)
• The amount to be paid
• The manner in which the payment is to be determined
• The number of payments or period to which the order applies

Once drafted, the QDRO will be submitted to the court for judge’s signature, and it will subsequently be sent to the plan administrator.

QDROs are complex, and mistakes can be costly. As such, it is advised that an attorney draft the QDRO. Typically the spouse who is receiving the funds will be the spouse required to pay the legal fees necessary to obtain the QDRO, and it will be that spouse’s attorney who does the legwork in creating and filing the QDRO.

Because obtaining a QDRO will increase legal fees, the spouse entitled to receive funds from the other spouse’s retirement account will often accept another asset of comparable value in lieu of the retirement funds. For example, if a wife is entitled to $100,000 from her husband’s qualified 401(k), she might prefer to take a lump sum in that amount from a non-retirement account, or even receive an asset worth $100,000. That way she is still receiving the value she is owed, but not paying her attorney to draft the QDRO.

If you are dividing an IRA you’ll need to make sure that the transaction is structured so that you are not taking a distribution. In order to do so, you’ll need to have the transaction reflect that it is a ‘transfer’ or ‘rollover.’ By structuring the transaction the transferring party will avoid a tax penalty. The receiving party will need to deposit the funds into an IRA or other eligible retirement account. Transferring the funds into a non-IRA account will create a taxable event.

If you are dividing a qualified employer plans such as 401(k)s, pensions, and SEP IRAs, the best way to ensure that transferring all or a portion of the funds to a former spouse doesn’t result in tax penalties is to obtain a Qualified Domestic Relations Order (QDRO). This is just a legal instrument that allows for a person to assign rights in a retirement account to another person. This order will allow the account to be separated and withdrawn with no tax penalty, so long as the funds are deposited in another retirement account. The order itself will be sent to the plan administrator after it is signed by a judge, and it will instruct the administrator as to how the funds are to be dispersed.

Non-qualified plans, plans that aren’t required to adhere to ERISA, are usually reserved for high-ranking and highly paid employees. Most of these plans cannot be touched by a QDRO, and can almost never be divided or assigned to a spouse. For these plans, the spouse entitled to a portion of the plan should receive the value she is entitled to in other ways, or enter into an agreement which prescribes a transfer to take place once the employee-spouse actually receives payment from the plan (usually at retirement).

Military retirement is fair game in equitable distribution. Any retirement earned during the marriage is considered marital property however there is a unique limitation with regard to a non-military spouse receiving direct payment from the federal government. In order to receive direct payment, the “10/10” requirement must be met; the spouses must have been married 10 years or more during which the military-spouse had at least ten years of applicable service.

Keep in mind that military retirement is still subject to division if the 10/10 requirement hasn’t been satisfied – this requirement only places a limitation on who can receive a direct payout from the Defense Finance and Accounting Service.