Retirement Assets in Divorce

January 7, 2014

In many divorce cases, the most valuable assets of the “marital estate” are the parties’ retirement assets. These can account for tens to hundreds of thousands of dollars of value. This article is a primer on this subject matter, summarizing (1) what forms these retirement assets commonly take, and (2) how spouses can approach a division and distribution of their retirement assets in divorce.

I. Common Forms Of Retirement Assets

A. Defined Contribution Plans

The two main categories of retirement assets are “defined contribution” and “defined benefit” plans. Defined contribution plans are employer-sponsored account-based plans, consisting of an employee’s own contributions to his or her retirement account over time, and perhaps the employer’s contributions like profit-sharing contributions or “matching.” These accounts are then invested, and market gains and losses are reflected in the employee’s account balance. Contributions are limited in amount per year and are generally pre-tax earnings, although post-tax earnings may be permitted as well (“Roth” plans). The money must remain in the defined contribution account until the employee reaches certain retirement or near-retirement ages, or for other circumstances like hardship; early withdrawals, as discussed more below, are immediately taxed as income and additionally penalized. By far the most common defined contribution plan in use today is the 401(k) plan, but there are many other defined contribution varieties.

B. Defined Benefit Plans

Defined benefit plans, once the most common form of retirement asset in the United States, have rapidly and are continuing to rapidly decrease in number. These are pensions. Pensions are large trust funds maintained by an employer, into which employer and/or employee contributions are made, and out of which are paid defined benefits to employees based on length of service with the employer, the employee’s averaged highest earnings, and other factors such as type of position within the employer and/or union affiliation. Pensions, unlike defined contribution plans, typically distribute benefits in annuity form measured by the life of the employee, and the employee has no individual “account.”

It is important to note that the majority of both defined benefit and defined contribution plans maintained by private employers are governed by the federal Employee Retirement Income Security Act (“ERISA”) and the Internal Revenue Code (the “I.R.C.”). The I.R.C. provides employers and employees with various tax breaks if the plans are “qualified.” ERISA describes what is required for plans to be “qualified,” including minimum participation and vesting

standards and, as discussed below, protection for spouses and former spouses. Parties to a divorce proceeding should devote special attention to any retirement plans not covered by ERISA and the I.R.C., because such default rules and protections would not apply to them.

C. Public Plans

Public plans are one example of non-ERISA plans. Public plans are maintained by federal, state, and local governments to benefit public employees such as public school teachers, public utility workers, policemen and firefighters, and persons in the military. These types of public plans are common in the divorce context and as a result, they generally have literature and sample judgment and decree language readily available to use.


Think of individual retirement accounts (“IRAs”) as do-it-yourself retirement assets. IRAs are not maintained by employers and are not governed by ERISA, but are maintained by the “individual” account-holder. IRAs are governed by the I.R.C., and as a result generally operate the same as 401(k) plans. Either pre-tax (“traditional”) or post-tax (“Roth”) dollars, up to an annual limit, can be contributed by an individual to their account, which account is invested, and the balance of the account will rise and fall with the market depending on the investments the account-holder elects. Generally (as with 401(k) plans), the participant will simply hire a third-party firm to do the actual investing. IRAs are also qualified vehicles into which other qualified retirement assets can be “rolled over,” tax-free, as discussed more below.

E. Other Types Of Retirement Assets

Given the diversification of the financial industry in recent years, which continues today almost in exponential fashion, it is impossible to list every type of retirement plan or asset that is presently available. Beyond basic defined contribution/defined benefit plans, our firm sees a lot of public plans and IRAs, as well as some of the following: (1) 403(b) plans–public schools and nonprofits; (2) “nonqualified” plans–generally for highest earners who want to exceed the annual contribution limits; (3) SIMPLE IRAs–meld of 401(k) and IRAs, where employer agrees to match employee’s contributions into an IRA; and (4) employee stock ownership plans (“ESOP”)–like a 401(k), except instead of cash, the employee gets company stock or stock options.

Competent attorneys should have ample experience with the most common types of retirement assets, but where the retirement asset is unique or unusual, even competent attorneys will seek input from financial advisors, accountants, and other experts in the field, prior to negotiating and finalizing terms of a divorce settlement.

II. Dividing And Distributing Retirement Assets In Divorce

A. Marital Versus Nonmarital Property

The first step in dividing and distributing retirement assets in the divorce context is determining which retirement assets are subject to division and distribution in the first place. This is a question of marital versus nonmarital property (some states call this “community versus separate property”). Generally speaking, only the marital interest of retirement assets is subject to division and distribution in divorce. In Minnesota, for instance, contributions made by the employee/employer prior to the date of marriage are nonmarital property, and therefore not subject to division and distribution in a divorce. “Tracing” is also an important concept; whereas nonmarital cash (such as an inheritance) that is contributed to a retirement account will generally not be divisible in a divorce, the appreciation in value of that account will generally be treated as marital in nature.

The worst outcome here would be failing to make nonmarital claims, and failing to object to the other party’s bogus nonmarital claims. To prevent such mistakes, competent legal counsel should be obtained early on in the divorce proceeding.

B. Value And Valuation Date

Accurately valuing retirement assets is commonly overlooked by spouses as well as attorneys with little familiarity in this subject matter. Our office makes it a practice to accurately value both parties’ retirement assets.

First, the valuation date of marital property is usually tied to the court’s scheduling order, though some states fix different standards, and in all states the parties can mutually agree to use a valuation date of their choosing, which is commonly done. Second, for defined benefit plans, an actuary is usually required to accurately provide a value as of the valuation date. Otherwise a spouse could try to argue that, because he or she is not actually receiving cash payments yet, his or her pension does not need to be counted in the marital estate, which is not accurate at all. As discussed below, survivors’ and other benefits are also valuable and should be valued along with the participant’s basic pension benefits. Third, for defined contribution plans, valuation generally consists of obtaining an account or balance statement for the particular valuation date. Lastly, as discussed below, where tax consequences need to be factored into the valuations of retirement assets, accountants should be hired to perform those analyses.

At the end of the day, the goal is to arrive at an accurate assessment of what each spouse contributes in terms of value to the marital estate. All retirement assets must be included in that assessment. Then the work of negotiating out a fair divorce settlement, or seeking relief in the courts if necessary, can begin.


Almost every article about retirement assets in divorce sufficiently covers qualified domestic relations orders (“QDROs”), so we will not spend a lot of time on it here. It suffices to say that ERISA-governed plans require a QDRO (basically a second court order) to divide and distribute benefits, and will not make any changes without a QDRO. In QDROs, divisions and distributions of retirement assets are described as “assignments” and other terms and conditions of the assignment are provided in QDROs as well. Note that, while public plans are not governed by ERISA, many have similar QDRO-like requirements that must be satisfied.

An attorney familiar with drafting QDROs and the various procedures for submitting QDROs to the courts and to plans for preapproval/approval should be consulted when the terms of the entire divorce have been agreed upon. Usually plans have sample QDRO language that they will preapprove, and it is advisable to contact the respective plans ahead of time and obtain such sample QDRO materials.

D. Ways To Divide And Distribute Retirement Benefits

In defined benefit/pension plans, generally division and distribution occurs either (1) as a percentage share of the “marital interest,” or a percentage share or flat amount of each monthly payment (“shared interest” approach); or (2) as a newly-created, separate defined benefit for the former spouse (“separate interest” approach). Shared interest approaches are much more common than separate interest approaches, and in shared interest approaches, the alternate payee begins receiving his or her award when the participant begins receiving his or her benefits. On the other hand, defined contribution plans are generally divided and distributed as a percentage of the account balance as of the valuation date, with all subsequent market increases and decreases allocated to that particular spouse’s share. Lastly, each spouse usually agrees to be equally responsible for any administrative costs that the plan imposes for implementing the division and distribution of the retirement assets.

E. When QDROs Are Not Required

For non-ERISA and non-public plans such as IRAs, no QDRO is required to implement the division and distribution of those retirement assets. Rather, the firm with which the retirement assets are maintained will simply implement the terms of the divorce judgment and decree, usually upon (1) receipt of a certified copy of the same, and (2) a letter of instruction with signature guarantee. Usually the recipient spouse is also required to fill out all necessary administrative forms to open a new account to receive the transfer. Each non-ERISA plan, we have found, has its own particular procedures and requirements, and so it is advisable to confer with these plans’ representatives prior to finalizing the terms and conditions of the divorce judgment and decree.

F. Tax Consequences

Immediate and adverse tax consequences should be a concern for defined contribution tax-deferred plans, like 401(k) plans and IRAs. As discussed above, these types of I.R.C.- governed plans are subject to (1) penalties for early withdrawals, and (2) immediate taxability as income. Fortunately, if done right, both taxes can be avoided. If a QDRO is used in conjunction with a qualified “roll over”–meaning that the divided and distributed funds are transferred into another I.R.C.-qualified vehicle–then both taxes are avoided. If no qualified roll over is elected, meaning that the recipient spouse simply receives a lump sum cash payment, then there is no penalty per the QDRO, but the payment is immediately taxable as income. If a QDRO is not required to be used, then the divorce judgment and decree will suffice as long as a qualified roll over is accomplished; if no qualified roll over is implemented, then the distributed funds will both be penalized and immediately taxable as income. Some spouses accept as a part of the divorce settlement these tax consequences, and in turn demand that these tax obligations reduce the overall value of the award they are getting; in such instances, consultation and analyses by an accountant will be necessary.

There are also I.R.S. forms that will need to be completed and filed along with tax returns of the parties, depending on the tax goals of the parties. Again, consultation with an accountant will be necessary to ensure compliance with the I.R.C. and any applicable regulations.

G. Survivors’ And Other Benefits

Lastly, something many spouses and attorneys overlook is survivors’ and other benefits. These issues generally only arise in defined benefit and public plans. Survivors’ benefits provide that, if the participant predeceases the former spouse, the plan will continue to pay some or all of those benefits to the surviving former spouse. ERISA requires its covered plans to provide this surviving spouse protection, both before and after retirement. From the former spouse’s perspective, these rights should be stated and preserved in a QDRO; from the participant’s perspective, because these ERISA-required protections reduce the overall benefit for the participant and any future spouses/beneficiaries, waivers in writing are often sought from the former spouse, in exchange for some other assets within the marital estate. Private negotiation generally resolves most survivors’ benefits issues. Because public plans do not provide former spouses with ERISA-like protections, it is especially important for former spouses of public employees to contact an attorney to ensure they are not waiving or forfeiting any valuable survivors’ rights that may nonetheless be available in the plan documents or applicable laws.

Other benefits that should be addressed include early retirement benefits (when the employee retires prior to “normal retirement age,” or in most plans age 65); other types of “death benefits” (usually in the form of lump-sum reimbursements of unused employee contributions); and naming beneficiaries for a newly-assigned share (such as, in a defined benefit plan, a subsequent spouse, or in a defined contribution plan, “beneficiaries” such as children). These various benefits and rights all have value and should be included in the marital estate and subject to valuation, division, and distribution as well.

III. Conclusion: Retirement Assets In Divorce

It is crucial to know both (1) what types of retirement assets are part of the marital estate, and then (2) how to go about valuing, dividing, and distributing them, ensuring that all areas of concern like tax consequences and survivors’ and other benefits are appropriately addressed. This article provides a starting point for both of these subject matters, hopefully answering some basic questions about the division and distribution of retirement assets in divorce.

This information is general in nature and should not be construed as tax or legal advice.