Retirement plans are often one of the most valuable assets in separation and divorce cases. They are also some of the least understood assets. For those attempting a DIY settlement, retirement plans are the most often overlooked assets.
Let’s start with how North Carolina courts classify retirement plans. Any portion of a retirement plan you acquired or earned before marriage or after separation is your separate property, along with gains and losses on that portion; it is not subject to division. Any part of a retirement plan you acquired or earned during the marriage and prior to separation is marital property that is subject to division, along with gains or losses on that part. Clients sometimes feel like a retirement plan they worked for should be their separate property, no matter when it arose. It does not work that way because North Carolina law views marriage like a partnership. Had the partners stayed together long enough to retire, they would have lived off the retirement assets of both partners.
How are retirement plans valued? North Carolina law values them as of the date of separation. If the plan is an account with money in it like a 401(k), 403(b), or an IRA (called a “defined contribution plan”), use the account statement nearest date of separation. A pension is a different kind of plan, called a “defined benefit plan.” With a pension, there is no money sitting in an account. Instead, it is the employer’s contractual promise to pay the employee a monthly benefit in retirement. There are expert consultants and online apps to calculate how much money it is worth as of the date of separation to have a stream of future monthly payments.
Next is how to divide them. If the marital portion of each party’s retirement plan is about equal in value, a judge often has each person keep their own plan as part of whatever overall division is decided. If it is necessary to transfer some from one spouse’s retirement plan to the other spouse in order to complete the division the judge decides is equitable, there are two ways to accomplish this. Some IRA plans accept an instruction letter from the IRA owner directing the company holding the funds to move a certain amount to an IRA owned by the other spouse. If the IRA custodian does not recognize instruction letters, then for that IRA as well as for all pensions, 401(k)s and 403(b)s, we need a Qualified Domestic Relations Order (QDRO). A QDRO is signed by the parties and entered by a judge as a court order. The QDRO directs the company holding retirement funds to roll over the necessary funds to whatever retirement account the receiving spouse wants to use. If the plan is a pension, the QDRO orders the pension plan to pay a certain percentage of the employee’s pension to the other spouse, beginning when the employee-spouse starts taking their pension. It is a good idea to have the plan administrator review the draft QDRO before having it signed and entered by the court, to avoid re-work. Many plans have online guides to help in preparing and submitting a QDRO.