In most Sacramento divorces, the largest or second largest asset is the retirement plan of one or both spouses, and dividing the assets in a plan can become complicated. All income earned by a retirement plan after the marriage took place is deemed community property, and state law requires that it be split equally between the divorcing spouses. Many retirement plans are governed by the Employee Retirement Income Security Act (“ERISA”), and distributions may trigger harmful tax consequences for the person that is the beneficiary. The most effective method of dividing pension benefits is the use of a Qualified Domestic Relations Order (“QDRO”).
ERISA allows a state official, usually a judge, to divide a plan that is qualified under ERISA between two parties. The plan must be made a party to the divorce so that the court can have legal authority over the plan. The QDRO must recite certain information about the parties, including their addresses, social security numbers, dates of birth, and other information that may be required by the plan guidelines. The QDRO must name the plan (or the plan’s representative) as a party that is subject to the court’s jurisdiction.
The QDRO may use different methods to divide the assets in the plan. In a defined-contribution plan, that is, a plan where the beneficiary makes a specific periodic contribution, the value is easily ascertained because it is based on the value of the securities held in the plan. The QDRO usually splits the total value of the plan assets equally and directs transfer of one-half of the plan assets to the spouse who is not named as a beneficiary. In defined benefit plans, that is, plans where the participant withdraws a specified amount, an actuary may be required to determine the plan value.
One significant benefit of using a QDRO to divide plan assets is the absence of any adverse tax consequences. Without a QDRO, the distribution of plan assets may be subject to a significant income tax and penalty. If a QDRO is used to divide plan assets, the IRS has said that the money may be transferred without being taxed. It is important to understand the tax implications of the property division decisions being made and an experienced attorney may be able to guide divorcing couples through the process.