Virginia Divorce Law: Types of Retirement Accounts

If you are going through a divorce case and have retirement accounts of any kind, it is important to know how those retirement accounts will be treated by the Court and common strategies for minimizing the impact on your retirement plans. Retirement accounts come in many different types. Retirement accounts can also be different depending on if you are a government worker or private sector.

So what are the most common types of retirement accounts, and how are they treated by the divorce court?

How Are Defined Contribution Plans Divided in a Divorce?

A defined contribution plan is a type of retirement account that you put money into over the course of your employment. That money is held until retirement age or a number of specific factors are met. There are many different types of defined contribution plans including 403(b) accounts, 401(k) accounts, SEP accounts, VRS accounts and TSP accounts.

Defined contribution plans may even have a match system depending on the employer. If you put so much of your paycheck into a defined contribution plan, your employer may have a matching policy.

Once you put those funds into a defined contribution plan, they get invested by a plan administrator in various types of assets. The type of plan you have will dictate the types of investments available. Different types of defined contribution plans have different rates of return and different tax advantages.

In a divorce case, the Court will look to see how much was contributed to the plan during the marriage. The Court will then divide this “marital share” and add any gains or losses that have happened since the separation based upon the market performance. These gains and losses are only based upon the contributions made during the marriage.

How Are Defined Benefit Plans Divided in a Divorce?

Although they are becomming more rare, many different types of employers are still offering these plans. These are essentially pension plans. Depending on how long you work for your employer, you may be entitled to monthly payments after you retire.

In the private sector, union jobs are largely the only remaining fields that have defined benefit plans. Government workers may still have defined benefit plans in the form of a FERS account.

In a divorce case, Virginia judges will typically use a formula to determine how these pensions will be divided:

PRESENT VALUE X (TIME WORKED DURING MARRIAGE/TOTAL TIME WORKED)

The best way to understand how this calculation works is to contact your plan adminstrator. They can potentially calculate the monthly benefits.

How Can a Divorce Lawyer Can Protect Your Retirement?

There are two very helpful type of people to have on your side if you are planning for retirement and divorce. You should have both a CPA and a divorce lawyer walk you through the types of retirement accounts available, their tax advantages, and whether it is a good idea to diversify your retirement. Even if you are not coontemplating a divorce, make sure to contact your CPA to understand your retirement plan and how to plan for the future.

Virginia Divorce Law: How to Handle Government Retirement Accounts

If you work for the federal or state government, your divorce is going to be more complicated. As discussed in another blog, every asset from the marriage gets divided in a divorce. This includes retirement accounts.

Government workers have special kinds of retirement accounts. Federal workers may be FERS or TSP eligible. State workers may have a VRS plan. Either way, it is important to know that these plans are more complicated to divide.

So what makes these plans more complicated, and how are they treated in a divorce?

Types of Plans: Defined-Benefit AND

Defined-Contribution

There are several major types of retirement plans. Each type of plan is treated differently. Two of the major types of plans are defined benefit plans and defined contribution plans. For more information on the pros and cons of each type of plan, you should consult with a Certified Financial Planner or another type of financial advisor to understand what kinds of plans will work best for you in retirement.

In the divorce context, a defined contribution plan is essentially a deferral of wages. You may make contributions to the plan over an extended period of time through your wages. Your wages get placed in an account and gain interest over time. Upon retirement age, you are then eligible to start receiving the benefit of that account. A TSP would be an example of a defined contribution plan.

A defined benefit plan is essentially a pension. Your employer will pay you a pension over a certain period of time based upon your time in service and the nature of your employment. A FERS would be an example of a defined benefit plan.

How Do Retirement Accounts Get Divided in a Divorce?

FERS and TSP accounts get divided differently in divorce cases. With respect to a TSP, the Court will simply divide the amount of contributions made between the date of marriage and the date of separation. The spouse, or in this context the Alternate Payee, will receive those benefits under a Qualified Domestic Relations Order.

In contrast, a FERS account does not get paid out the same was a TSP. You cannot roll over a lump sum payment from a FERS account. Your spouse will receive a portion of your monthly benefit. The typical method of calculating the amount of monthly benefit paid directly to your spouse is handled mostly by the plan administrator. The plan administrator takes the “present value” of the account and multiples it by a fraction. That fraction is essentially the amount of time you have worked for the government during the marriage as the numerator, over the total amount of time you have worked for the government expressed as a denominator.

Why You Need a Divorce Lawyer

The division of retirement accounts is one of the most complicated aspects of divorce cases. Improperly calculating benefits can lead to thousands of dollars of lost marital assets. Plan administrators are also very particular about the preparation of the Qualified Domestic Relations Orders. You need to hire a lawyer to make sure these retirement accounts are handled correctl

Virginia Divorce Law: Understanding Qualified Domestic Relations Orders

If you are getting a divorce and you have retirement accounts, you need to know about Qualified Domestic Relations Orders (“QDROs”). These documents are important because your retirement company may require these documents in order to divide your retirement accounts. Not all retirement accounts are covered, so it is important that you understand the basics. If you fail to handle the QDRO correctly, it can result in thousands of dollars of damages for your mistake.

So what is a QDRO, and why do you absolutely, positively need a lawyer for one?

What is a QDRO?

A QDRO is a document required by federal law to divide a retirement account. It is an additional piece of paper that is filed with the divorce court and signed by the judge. The document authorizes your plan administrator, the person responsible for your retirement account, to distribute funds.

What Types of Retirement Accounts Require a QDRO?

There are only certain types of “qualified plans” that require a QDRO. Other types of plans, such as government pensions, may require other types of documents such as an ADRO. A QDRO is specifically designed to address The most common types of plans that require a QDRO are 403(b) and 401(k) plans. IRAs are typically not divided through a QDRO. Government pensions are also not often divided by QDRO.

What Is The Process For Preparing a QDRO?

A QDRO is a highly technical document. It is a document that is relied upon by accountants to tell them exactly how to calculate your share of your spouse’s retirement accounts. As such, there are several specific provisions in the QDRO that may be unique to individual plans. A lawyer will typically obtain the template QDRO from your plan administrator and make substantial changes based upon what is ordered by the court or agreed by the parties for division of the retirement accounts. The template often does not cover exactly what you need.

Why You Absolutely, Positively Need a QDRO Lawyer.

There are a lot of pitfalls in preparing a QDRO. There are complicated concepts such as gains, loses, market performance, loan accounting, and valuation dates that can trip even lawyers up. If you are not careful about which options you select in a QDRO, it can snowball into a massive accounting mistake. Even checking one simple box wrong could lead you to be responsible for a massive deficit or even a large tax bill.

That is why it is important to do a QDRO right the first time. Under no circumstances should you ever attempt to handle a QDRO alone. Even when it comes to lawyers, you need to make sure your lawyer has handled QDROs before. Many divorce lawyers refer QDROs out because of how complex and dangerous they can be. If you have retirement accounts and are getting divorced, talk to a qualified lawyer.