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In a divorce, oftentimes one of the most significant marital assets to be divided is a party’s retirement savings or pension. In order to divide or transfer this interest in a divorce, irrespective of the size of the account or interest, you may be required to obtain a separate order from the Judge compelling the division and transfer from one spouse to another.
Why is an order required?
In 1974, congress passed the Employee Retirement Income Security Act (“ERISA”), which requires, in relevant part, that certain retirement plans not transfer or assign their employees’ retirement funds or benefits. An exception to this anti-assignment and anti-alienation rule is if the transfer or assignment takes place pursuant to an order. If a transfer occurs without an order, one of the primary consequences would be that the retirement plan would lose their status as a plan covered by ERISA, as well as many tax benefits. In some cases, a retirement plan is not covered by ERISA, but an order is required by the employer.
Why shouldn’t I just have my spouse cash out my portion and give it to me?
Although your spouse could just cash out your portion of their retirement, there would be serious tax consequences. A distribution from a qualified plan pursuant to a properly drafted order, however, is exempt from a 10% early withdrawal penalty. Depending on the size of transfer, this could result in a savings of hundreds or thousands of dollars.
Do I need an order?
In order to determine whether you need an order, you will need to identify and determine the type of retirement account or benefit being divided and transferred. Not every retirement interest will require an order. For example, to divide and transfer an Individual Retirement Account, typically does not require a separate order. Nevertheless, most defined contribution plans, such as a 401(k) account, 403(b) savings plan or profit sharing plans, and pension plans do require an order.
What type of order do I need?
Unfortunately, there is not a one-size-fits-all order to divide retirement interests. There are several different types of orders, and the type you require depends on the nature of the retirement account or benefit being divided and transferred. The most common type of Order required by private retirement plans is a Qualified Domestic Relations Order “QDRO.” Another type of order is a Court Order Acceptable for Processing “COAP,” which is required to divide any federal pension, except military. A Military Pension Division Order “MPDO” is the type of order that is required to divide a military pension.
How long will it take before my portion of my ex-spouse’s retirement interest is transferred into my name?
The time frame to prepare, submit and process an order will depend on the employer and the type of the order. In most cases you can expect that it will take at least several months, but in some rare cases it may take a few years.
My divorce is already final, but my attorney never prepared an order to transfer the retirement I was awarded. Is it too late?
Many people going through a divorce are unfamiliar with this area of the law and are unaware of how important it is to have an order prepared at the time of the divorce. Nevertheless, it is likely not too late to have an order prepared.