More than twice as many men as women have retirement benefits, and the benefits for men are generally much larger than those for women. Because of this, women very often are in a position to trade off their share of spousal retirements for other assets.

Most people going into a divorce do not realize that the pension benefits of a couple ending a long marriage may be greater than the house the couple lives in. A frugal couple who lived in one house for the duration of a long marriage may have accumulated retirement benefits greater than the market value of the home.

QDROs apply to ERISA-qualified pension plans, including defined benefit and defined contribution plans, 401(k)s, thrift savings plans, some profit-sharing and money-purchase plans, Keoghs, tax sheltered plans, and ESOPs. IRAs, which are subject to distribution, must be divided without a QDRO. ERISA prevents owners from assigning pension benefits to another person, so QDROs eliminate any barrier to their distribution as part of divorce. This, however, requires a QDRO.

A QDRO is a way of dividing these benefits equitably. Here are a few points to remember:

> Defined contribution plans have cash value today.
> They can be divided by a QDRO.
> A portion of the defined benefit plan can be transferred to the IRA for a former spouse without tax consequences.
> In some cases, the plan can be divided so that the former spouse now has an account with the company.

Normally, early distributions from a qualified plan -- those made before the age of 59 1/2 -- are subject to a 10 per cent penalty tax. I.R.S. tax regulation (72)(t)(2)(C) provides, however, that when money is withdrawn in accordance with a QDRO, the recipient can take it without penalty.

Care must be taken with transferring money from a defined contribution plan. In a divorce, money should be transferred from a qualified plan, which means sent from the qualified plan to an IRA, not out of it, which means rolled over to the recipient. Money paid directly to either spouse is subject to withholding and penalties.

Defined contribution plans, such as 401(k)s, are easier to divide than are defined benefit plans, which are the old-fashioned company pensions. For distribution purposes, the value of a defined benefit plan is harder to calculate because the payout is based on a plan formula, not an individual account. In general one of three methods -- called "present value" or "cashout," "deferred division," or "reserved jurisdiction" -- are used.

A QDRO "creates or recognizes the existence of an alternate payee’s right ... to receive all or a portion of the benefits" that otherwise would have gone to the owner. A properly written QDRO describes not only how the assets of a pension plan are to be divided, but what happens when the parties die. That means that the QDRO defines the survivor’s benefits that are paid to nonemployee, which is usually the wife. This is of particular concern to a woman who may go into her retirement with a smaller retirement benefits of her own (or none at all) and live longer than her former spouse.

QDROs distribute pensions along the approaches known as 1) shared interest (the so-called "if, as and when received" routine), which means both the employee and nonemployee spouse begin to receive benefits at the same time; 2) separate interest, which means that the alternate payee may receive benefits when he or she chooses; and 3) qualified joint and survivor annuity, which provides for survivorship rights for the alternate payee. Each of these approaches have advantages and disadvantages.

Care must be taken in writing a QDRO. It must specify the name of each participant, his or her mailing address and that of the alternate payee, the percentage to be received by each payee (or the manner by which the percentage is calculated), the duration of the order (the number of payments) and the plan to which the order applies.

A QDRO should be written with the proposed separation agreement or divorce decree because if the owning spouse dies or retires before it is entered, the alternate payee may have problems collecting.

Even when a pension is divided 50/50, the division may produce what are termed "disparate results" because of the ages of the payee and alternate payee.

Because so many more men than women have retirement benefits, and because the benefits men have are generally much larger than those for women, women very often have leverage to bargain with the pension rights. When the parties have other assets sufficient to do this, the offset method -- trading the pension to the participant in exchange for, say, a mutual fund -- may be more desirable than a QDRO.

See Defined Benefit and Defined Contribution Plan.

See also Domestic Relations Order (DRO).

Your Suggestion

1. Don’t Forget the Pensions
   It’s wise idea to get pensions appraised. Appraising a pension costs a few dollars, but pensions can be worth a great deal of money, particularly to a stay-at-home mother whose economic contribution to the marriage was child rearing. After the family home, the breadwinner’s pension may be the largest asset many couples divide when they divorce.
   Contributed on 8/1/2007 by: DivorceDex.com Staff

   Category: Retirement Accounts   (Applicable in All States)

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