Many divorcing couples have retirement plans that they will want to divvy up as part of the equitable distribution process. Often times, a spouse will have to transfer a portion of their retirement assets to the other spouse in order to balance his/her share of the marital assets. Retirement plans that fall under ERISA (Employee Retirement Income Security Act), such as 401(k) plans and defined benefit pension plans, do permit this type of “asset transfer” through the use of a Qualified Domestic Relations Order (QDRO). Roth and Traditional IRA plans also permit this type of asset transfer through the use of a Domestic Relations Order (DRO).
In situations where assets from a non-traditional deferred compensation plan are at stake, dividing these assets is often more difficult. Here’s why. Whereas 401(k) plans and defined benefit pension plans are considered “qualified” plans―setup and governed by ERISA, non-traditional deferred compensation plans are setup and governed by employers, not ERISA. Therefore, it is the employer who dictates the rules and provisions in a non-traditional deferred compensation plan, which is why these plans are commonly referred to as nonqualified plans. And, since employers typically reserve these “nonqualified” plans for their highly compensated executives, these plans can quickly accumulate substantial assets. And, therein lies the rub…because if you are going through a divorce and your spouse has a nonqualified retirement plan through his/her employer, you cannot assume any portion of those assets will be within your reach. In fact, it’s fairly common for an employer to setup a nonqualified plan with provisions that bar asset transfers of any kind, particularly in a divorce, or provisions that include stiff penalties―all of which would certainly impact the calculus for an equitable distribution. If you encounter such terms, negotiations around dividing your marital assets will be quite different. For this reason, it is essential that you and your attorney make every effort to obtain plan summary and related plan documentation for all the retirement accounts you and your spouse own BEFORE you begin the process of dividing your martial assets. Making sure you thoroughly understand the rules governing these retirement accounts will go a long way in ensuring an accurate and equitable outcome.