Splitting a North Carolina State Employee’s Retirement Account
Each different type of retirement account has its own unique rules to be followed when being divided. For instance, the way you divide a traditional or Roth IRA incident to divorce is much different from how you would divide a pension, 401(k) or military retirement. There are different rules for defined benefit plans and SEP IRAs as well, and true to form, dividing a state employee’s retirement requires attention to certain unique rules. Here we will address all of the particulars about splitting an account governed by the Department of State Treasurer.
The Domestic Relations Order
What is it?
In order to divide a Department of State Treasurer retirement plan you will need to obtain a Domestic Relations Order (DRO).
A DRO is different from a Qualified Domestic Relations Order (QDRO), which applies to qualified employer plans that are subject to the Employee Retirement Income Security Act (ERISA). Because neither federal nor state government retirement plans are subject to ERISA, a QDRO is not the appropriate legal vehicle to use in attempting to distribute funds of a state employee’s retirement plan incident to divorce.
Why does it matter whether it is governed by ERISA?
Outside of simply requiring a different legal document in order to divide the account, there is a major difference with regard to how ERISA and non-ERISA accounts handle a change in the plan’s beneficiary.
If the owner of a retirement plan subject to ERISA would like to change the listed beneficiary on his or her plan, the plan owner’s spouse would be required to waive his or her potential rights in the benefits before the change could be made. Because state employee plans are not subject to ERISA, the plan owner can make any changes on the plan without a waiver from his or her spouse, so long as there is no DRO in place.
Which plans require a DRO?
Any public pension plan acquired through employment with a state agency will require a DRO; the two most common plans that require a DRO are the Teachers and State Employee’s Retirement System and the Local Governmental Employees Retirement System. These plans are referred to respectively as the TSERS and LGERS.
The plans noted above are defined benefit plans, and participation in the plan by the employee is mandatory. Defined contribution plans, which have optional participation, also requires a DRO in order to distribute the account incident to divorce.
What is the difference between defined contribution and defined benefit plans?
The major difference between these plans is that a defined contribution plan can be divided incident to divorce at any time, whereas no disbursements can be taken from a defined benefit plan until the plan owner retires.
In other words, if your spouse has a defined benefit state retirement plan, you won’t receive your marital share until your spouse retires and begins collecting the benefit.
Another difference is that the funds from a defined contribution plans may be distributed in a lump sum or in periodic payments whereas a spouse receiving from a defined benefit plan will receive either a stated percentage or dollar amount each month. Whatever monthly amount the non-state employee spouse takes from the plan it cannot be larger than the amount the employee-spouse takes.
Who drafts the DRO?
Your best course of action is to hire an attorney to draft the DRO, or at a minimum have an attorney review your DRO to ensure everything has been handled correctly. However, The Retirement Services Division (RSD) does provide some samples, which we have shared on our website as well, for those who wish to tackle the DRO without the help of an attorney.
Where do I send the DRO?
Ultimately the DRO is submitted to the Court, and once it has the judge’s signature on it, it will be submitted to the RSD. However, because the RSD is particular about terms of any submitted DRO, it is suggested that you or your attorney send a draft to the RSD before actually submitting the document to the court.
If you do in fact send a draft, the RSD will notify you of any terms that need to be changed or language that needs to be altered in order for the DRO to be accepted. If you submit a DRO that has already been signed by the judge, it may still be rejected unless terms are consistent with the RSD’s requirements.
Submitting a draft can save a lot of time and headache, otherwise you may find yourself in a situation where your judge-signed DRO is not accepted and you’ll have to take corrective measures.
What information is included in the DRO?
The DRO will need to resemble any other court document; the state and county, the appropriate court that is hearing the matter, the file number, the name of plaintiff and defendant will need to be included in the caption at the beginning of the document.
You also must include the name of the judge, the date, and relevant findings of fact. These findings of fact will include the date of marriage and date of separation, an acknowledgement that Equitable Distribution is being addressed by the parties, either by agreement or through the courts, a reference to which Retirement System plan the spouse is a member of (i.e., TSERS or LGERS), and the amount and way in which the funds are to be disbursed.
After the findings of fact, the actual order should be listed. The order should reference the finding of fact where the amount and manner of payment is addressed. The order should also address additional relevant topics, such as what is to happen if the employee-spouse dies before the non-employee spouse who is to receive pursuant to the terms of the DRO.
Finally, the order should be dated and signed by the judge. All of this will be clearer after you have viewed the sample order.
To be sure that the terms of your DRO will be accepted and implemented by the RSD, however, consider submitting a draft as mentioned above.