Non-Vested Pension Division During a Divorce
Divorcing spouses have a right to a fair division of their marital retirement accounts. In most states, courts view both types of benefits marital property if the contributions were made during marriage. Each spouse has a right to receive a share of the marital retirement funds. However, since pension plans restrict access to funds before a beneficiary reaches retirement age under federal law, the federal government created an exception to the non-distribution rule for divorcing spouses.
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Overview
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When spouses divorce, they must divide their marital property between them before courts will enter divorce decrees. States are either common law equitable distribution jurisdictions or minority community property jurisdictions. Although there are some major differences between the two sets of divorce property laws, all states require divorcing spouses to enter into written property settlement agreements memorializing their property division. Alternatively, parties who are unable to settle upon property distributions can request a judicial determination allocating their property.
Employee Retirement Income Security Act of 1974
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The Employee Benefits Security Administration within the U.S. Department of Labor administers the federal Employee Retirement Income Security Act of 1974 (ERISA). ERISA establishes the minimum federal standards that private employers must follow when providing their employees with pension benefits and rights to contribute to private employment retirement plans. Although employers are not legally required to establish retirement accounts for their employees, they must comply with ERISA if they provide them. According to ERISA, non-vested pension plans are subject to the mandatory distribution rules within the Internal Revenue Code.
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Qualified Domestic Relations Orders
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Because pension plans and retirement funds may limit an employee's right to distributions before retirement age, the Qualified Domestic Relations Order (QDRO) exceptions within the Internal Revenue Code allow divorcing spouses to allocate their pension and retirement assets by written agreement. Pension plans can limit distributions to beneficiaries who reach retirement age -- typically 59 1/2, and some plans may allow early distribution upon a showing of financial hardship.
All retirement contribution plans must allow beneficiaries the right to receive distributions at death, divorce, termination of employment or upon disability. QDROs that comply with federal law provide divorcing spouses with the ability to transfer retirement assets. Furthermore, under the federal tax laws, validly created QDROs allow divorcing spouses the ability to receive their distributions without incurring the federal 10 percent tax penalty for early withdrawal. However, QDRO beneficiaries are subject to federal income taxes on their distributions.
Federal QDRO Requirements
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A valid QDRO must be in writing and made pursuant to a divorce judgment or decree. A court must issue the decree under ERISA. ERISA requires that a valid QDRO contain certain information, including the names of the beneficiaries, addresses, identification of an alternate payee and her address, the distribution amount and method of valuation. Furthermore, a QDRO must include the percentage or dollar benefit amount upon distribution. Since most pensions limit distribution of funds to retirement age, a pension valuation must provide the actuarial basis used to arrive at the percentage of distribution once a spouse reaches retirement age.
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References
- U.S. Department of Labor: Employee Retirement Income Security Act --- ERISA
- Internal Revenue Service: Retirement Topics - QDRO - Qualifed Domestic Relations Order
- U.S. Department of Labor: FAQs About Qualified Domestic Relations Orders
- U.S. Department of Labor: The Division of Retirement Benefits Through Qualified Domestic Relations Orders
