How the account is divided, and whether a QDRO or some other specialized order is required, depends on the type of account. Regardless of the type of account, however, there are five basic pieces of information that a Plan Administrator or QDRO drafter will need in order to properly divide the account. When drafting a Divorce Agreement or proposed Judgment it is best practice to include these five elements:
- Identify the Plan Information Clearly - It may seem obvious, but the Agreement or Judgment must sufficiently identify the retirement account so it is clear what account or accounts are being divided. Specific account numbers and additional identifying information should be included in the financial statement rather than the Agreement itself. That way the personal financial information remains out of the public file, but is available if necessary to clarify which account or accounts are being divided.
- Identify the Amount or Percentage to be Divided (but not both) - The division must be expressed as a percentage of the account or an exact dollar figure to be divided. If a percentage and a figure are included in an Agreement then it can be ambiguous if the calculations don't match. Also, in most cases the plan will not allow for a mix of percentages and amounts (e.g. 50% of the plan minus $10,000), so avoid any mixing and complete any necessary calculations prior to finalizing the agreement.
- Identify the Division Date & Coveture Period - Accounts change in value due to market fluctuations (dealt with below), but also due to withdrawals, loans, and ongoing contributions. All of these changes can create havoc with a division if a clear date of division is not identified. If only a date of division is identified, then it's implied that the division includes all of the retirement account from the beginning of time until the date of division. If the parties or the court intend to exclude premarital funds (or some other agreed upon exclusion period), then that information needs to be included in the order as well. The period of the account that would be divided is generally referred to as the coveture period. Simply stating that the parties divide the "marital coveture" period is not sufficient because this doesn't clarify whether the end date of that period should be the agreement date, the Judgment of Divorce Nisi date, or the Judgment of Divorce absolute date. The agreement or order should define the "marital coveture" period if that term is used.
- Identify whether Market Gains & Losses are to be included in the Division - Divisions are not immediate. Even in the simplest of cases the paperwork takes time to be completed, submitted and reviewed. During that time, fluctuations in the investments for retirement accounts can be significant. It is typical to include these fluctuations so that, as much as reasonably possible, the division approximates how each portion would have performed separately if they were divided as of the agreed upon date of division. However, if this is not specified then it may not be clear whether gains & losses should be included.
- Identify whether Loans are Included - If a loan has been taken out against a retirement account then that will be reflected in the value. If the division is a percentage than the Agreement or Order needs to specify whether the percentage is to be taken from the total account value (including the loan amount) or the net value (not including the loan amount).
Also, some plans may require addressing specific additional information, and in every case you and your lawyer should review the Summary Plan for the account to ensure that there aren't any unusual requirements. For example, U.S. Military Thrift Savings Plans have special rules and don't follow QDROs, but similar orders can be created that have the same effect. A plan that is more typical than a military pension is a private pension plan with survivor benefits. These types of plans require the following additional information to be specified in the agreement or order:
- Identify the Survivor Beneficiary - In a pension plan that includes survivor benefit options, those options are like an additional asset that needs to be addressed. If the parties agree or the court decides that it is a marital asset, then that portion of the pension may need to be assigned as well. If the ex-spouse is not designated as the survivor beneficiary then the plan owner will be able to change it to someone else, or if they remarry, the new spouse may automatically be their survivor beneficiary.
- Identify the Plan Option - In a pension plan that includes survivor benefit options, there are often multiple options that the plan owner can choose from at the time of retirement. Usually choosing to reserve a survivor benefit reduces the lifetime benefit. A QDRO can require that a particular option be selected, and this should be decided at the time of drafting the Divorce Agreement. In addition, if an option with a survivor benefit is chosen, the QDRO may need to specify how the reduced lifetime benefit is effected: i.e. is the reduction shared by the parties or does the reduction only come out of the ex-spouse's share of the lifetime benefit?