A divorce is a time of division in every sense of the word. The parties and their attorneys spend considerable time negotiating and drafting agreements which divide time with their children, divide their income, and divide their assets and debts. With all the attention spent on dividing things in divorce proceedings, it never ceases to amaze us at Las Vegas QDRO as to how little time is spent dividing the parties’ retirement. Divorce decrees will go on for paragraphs about how the parties will divide their homes and home furnishings but spend only a couple of sentences dividing the parties’ pensions and retirement accounts which (unbeknownst to the parties) are often the most valuable asset of their marriage.
If you are in the midst of a divorce, we at Las Vegas QDRO would like to provide you with at least 6 “always” and “nevers” to discuss with your divorce lawyer before your case is settled or taken to trial.
1. Never use the “time rule” to divide a defined contribution plan. It is important to know that the so-called “time rule” promulgated in various appellate courts in the United States, including Nevada, do not apply to defined contribution plans such as 401(k), 403(b), and other such individual retirement plans with a readily identifiable account value. If you attempt to divide such plans in accordance with the time rule you invite dangerous ambiguity in the property division and could create an unintentional windfall in favor of one party over the other. For this reason, the community and separate property interests in defined contribution plans should be clearly established in the settlement. The decree or marital settlement agreement should divide the account by way of specified dollar amount or percentage.
2. Always address loans when dividing a defined contribution plan. Many defined contribution plans allow for the participant to take loans against the account balance. The plan administrator views these loans as an asset and includes them in the total account balance. For example, if a 401(k) account contains $80,000 in stocks and bonds and also has an outstanding loan balance of $20,000, the plan administrator would view the account as having a total balance of $100,000. If in this example, the divorce decree merely provides the alternate payee 50% of the 401(k) account balance, the plan administrator might interpret such language as providing $50,000 (i.e. 50% of $100,000) to the alternate payee. This interpretation would leave the plan participant with $30,000 in stocks and bonds and a $20,000 loan to repay. In most circumstances, the participant, in this example, will likely not be happy with this outcome. Of course, there might be times when such an outcome would be appropriate (for example when a participant borrows from a retirement account without the other spouse’s knowledge or is in violation of a joint preliminary injunction). The point is that, when dividing a defined contribution retirement account, the divorce lawyers should know whether there is a loan against the account and be intentional on how that loan is to be treated in the overall retirement division.
3. Always address gains and losses when dividing defined contribution plans. The account balances in defined contribution plans are almost always invested in some form of security. As such, the account balances fluctuate (increase or decrease) with market forces. It is, therefore, important that your attorney address in the divorce settlement whether the alternate payee’s share of the retirement account will be subject to those market forces. This issue becomes particularly important if the qualified domestic relations order is not entered at or near the time of the divorce decree. The longer the period between the entry of the decree and segregation of the retirement funds, the greater the likelihood of a significant increase (or decrease) in the retirement account.
4. Never divide a military retirement account without addressing the Survivor Benefit Plan. When a military retiree passes, so does the retirement pay. Because the former spouse’s share of the retirement ends upon the retiree’s death, attorneys representing former spouses need to be aware of the Survivor Benefit Plan (“SBP”). The SBP is an insurance plan which will provide monthly annuity payments to a former spouse if the retiree predeceases him or her. If the former spouse is to receive the SBP, it must be stated in the decree.
5. Always identify the appropriate survivor benefit option when dividing a PERS pension. Every qualified domestic relations order dividing a pension through the Nevada Public Employee Retirement System (PERS) must designate one of six options pertaining to the survivor benefit, if any, that will apply in the case of the participant’s death. Unfortunately, we see many decrees which merely divide PERS benefits by way of the “time rule” and fail to address the survivor benefit option. This causes LVQ to go back to the client to identify the appropriate option. This often causes the client to go back to the attorney who drafted the decree. These clients are typically not very happy. It is, therefore, imperative to address the survivor benefits at the time of settlement or trial.
6. Always address survivor benefits when dividing traditional pensions. Under current Nevada law, a decree which divides a pension in accordance with the “time rule” does not automatically divide the pension’s survivor benefits. As such, every marital settlement agreement should address how the pension’s preretirement and post-retirement survivor benefits are to be allocated.
The foregoing, of course, is not an exhaustive list of the issues that should be addressed when dividing retirement upon divorce. They are, however, some of the most common we at Las Vegas QDRO encounter when preparing QDROs. Don’t trust your most valuable asset to your family lawyer’s one-size-fits-all decree of divorce. Call Las Vegas QDRO today (702) 263-8438 for a free consultation.