Retirement Orders in Family Law: What
Every Practitioner Needs to Know
BY JESSICA ZADJURA, ESQ.
The errors that surface in retirement order work rarely stem from ignorance of the law. They stem from timing, drafting gaps, and assumptions that the details will work themselves out after the decree is entered.
Retirement plans encountered in family law practice generally fall into three categories: defined contribution plans, defined benefit plans, and individual retirement accounts.
Retirement assets are among the most valuable assets in a marital estate and among the most frequently mishandled in divorce practice. The errors that surface in retirement order work rarely stem from ignorance of the law. They stem from timing, drafting gaps, and assumptions that the details will work themselves out after the decree is entered. They do not. What follows is a practical overview of how retirement orders work, what attorneys need to gather, and what every family law practitioner should have in mind from the first client meeting through the close of the file.
What a Retirement Order Is and What It Does
A domestic relations order is a judgment, decree, or order made pursuant to state domestic relations law that assigns to an alternate payee, typically a spouse or former spouse, the right to receive all or a portion of a retirement benefit that would otherwise belong solely to the plan participant. The order does not create a new benefit, but divides an existing one.
When that order meets the requirements of the Employee Retirement Income Security Act (ERISA) and the specific requirements of the plan being divided, it becomes a qualified domestic relations order, or QDRO. The word “qualified” refers to the plan’s determination, not the court’s. A judge signing the order does not make it qualified. The plan administrator reviews the order against the plan’s own requirements and either accepts or rejects it. Until that review is complete and the plan administrator accepts the order, the alternate payee has no enforceable right against the plan itself.
Different plan types require different instruments. ERISAgoverned plans use a QDRO. Federal civilian plans governed by the Federal Employees Retirement System (FERS) or the Civil Service Retirement System (CSRS) require a court order acceptable for processing (COAP) to be submitted to the Office
of Personnel Management. Military retirement is governed by the Uniformed Services Former Spouses Protection Act and requires a separate order submitted to the Defense Finance and Accounting Service (DFAS). Most individual retirement accounts (IRAs) do not use an order, but are divided through a transfer incident to divorce, coordinated directly with the custodian. Submitting the wrong instrument to the wrong authority costs your client time, money, and sometimes their benefit.
The Most Common Plan Types
Retirement plans encountered in family law practice generally fall into three categories: defined contribution plans, defined benefit plans, and individual retirement accounts. The division mechanism, the drafting considerations, and the risks to the alternate payee differ across all three.
A defined contribution plan is an account-based plan. The participant contributes a defined amount, the employer may match, and the account grows or shrinks based on investment performance. 401(k)s, 403(b)s, and profit-sharing plans are the most familiar examples. The account has a visible balance at any given time, which makes the division math relatively straightforward. The alternate payee’s share is typically expressed as a percentage of the account balance as of a specific valuation date, or as a flat dollar amount. These plans are governed by ERISA and are divided through a QDRO.
A defined benefit plan, commonly called a pension, is an entirely different structure. There is no account balance. The plan promises the participant a specific benefit at retirement, calculated based on years of service, salary history, and a planspecific formula. The participant does not own an account; they own the right to a future income stream. Because there is no balance to divide, the alternate payee’s share is typically expressed as a percentage of the participant’s benefit at retirement on an if, as, and when basis, limited to the marital portion. That marital portion is usually calculated using a coverture fraction: the number of years the participant accrued benefits during the marriage, divided by the participant’s total years of benefit accrual, multiplied by the alternate payee’s assigned percentage. The coverture methodology must be defined precisely in the separation agreement. If it is not, the domestic relations order (DRO) drafter cannot supply that definition, and the question returns to the attorneys after the case is closed. Defined benefit plans are also governed by ERISA when employer-sponsored, and are divided through a QDRO, though the drafting is considerably more complex than in the defined contribution context.
An IRA is not an employer-sponsored plan and is not governed by ERISA. It is an account the individual holds directly with a financial institution, funded by personal contributions, rollovers from employer plans, or both. Traditional IRAs are funded with pre-tax dollars, and distributions are taxed as ordinary income at the time of withdrawal. Roth IRAs are funded with after-tax dollars, and qualified distributions are tax-free. That distinction
matters in negotiation: a traditional IRA and a Roth IRA with equal nominal value are not worth the same amount to the recipient because the tax treatment of distributions differs. Attorneys should flag this for clients and, where the amounts are significant, recommend that a financial adviser or accountant be consulted before agreeing to a division. IRAs are not divided through a QDRO. They are divided through a transfer incident to divorce, which is a direct transfer between custodians authorized by a divorce decree or separation agreement. Done correctly, the transfer is not a taxable event. Done incorrectly, it can trigger taxes and early withdrawal penalties.
What to Request During Discovery and Negotiation
Before you can negotiate a retirement division intelligently, you need complete information about each plan. The following documents should be requested as a matter of course.
For all plan types, request the most recent account or benefit statement, the summary plan description, and the plan’s DRO procedures if available. Many plans publish their DRO
survivor benefit options and their associated costs, and information about any early retirement subsidies or other ancillary benefits the plan provides. These ancillary benefits are sometimes divisible and are frequently overlooked.
For IRAs, request the most recent account statement, documentation of the account’s value as of the date of marriage if the account predates the marriage, and confirmation of whether the account is a traditional or Roth IRA. If the account was funded in part by a rollover from an employer plan, request documentation of that rollover, as it may be relevant to tracing arguments about the pre-marital portion.
For federal civilian and military plans, request the participant’s most recent earnings and leave statement, which reflects plan contributions, and any prior court orders already on file with the plan, as prior orders can affect what remains available for division.
If the opposing party is uncooperative, information regarding the retirement plan is obtainable through formal discovery. A subpoena directed to the plan administrator will typically yield
Before you can negotiate a retirement division intelligently, you need complete information about each plan.
procedures and model order language, and reviewing those early can prevent drafting the separation agreement in a way the plan will not accept.
For defined contribution plans, request statements showing the account balance as of the date of marriage, the date of separation, and the most recent available date. Also, request documentation of any outstanding loans against the account, any hardship withdrawals taken during the marriage, and the current beneficiary designation.
For defined benefit plans, request a benefit estimate showing the projected monthly benefit at normal retirement age, documentation of the participant’s credited service history, including dates of hire and any breaks in service, the plan’s
plan documents and participant records. Benefits information can also be requested directly from the Social Security Administration to estimate future Social Security income, which is relevant context, even though Social Security benefits themselves are not divisible as marital property.
Start with a Complete Picture
Before you negotiate, identify every retirement asset in the case. Do not wait until the settlement agreement is being drafted. Defined contribution accounts, defined benefit pensions, IRAs, and deferred compensation plans all divide differently, and the division mechanism matters as much as the dollar value. Knowing what you are dealing with before you sit down to negotiate is not optional.
The
Separation Agreement
Is Where Most Errors Originate
A domestic relations order can only divide what the separation agreement authorizes. If the agreement is ambiguous about which plan is being divided, whether the division is structured as a separate interest or shared interest, what percentage is being awarded, whether survivor benefits are included, or how the marital portion is defined, the retirement order cannot resolve that ambiguity. Those questions come back to you, usually after the case is closed. One practical option is to involve the DRO drafter earlier in the process, either by referring the drafting out before the agreement is finalized or by consulting with that attorney during negotiation. Either approach reduces the risk of drafting the agreement in a way that the order cannot support.
A domestic relations order can only divide what the separation agreement authorizes.
Survivor benefits in defined benefit plans deserve particular attention. The participant elects a form of benefit at retirement, and that election determines whether the alternate payee receives anything after the participant dies. If the order does not designate the alternate payee as a surviving spouse for plan purposes, that protection does not exist. It must be negotiated in the agreement, carried through to the order, and explained to the client. If the client chooses to waive survivor coverage, that should be an informed decision, not an oversight.
In defined contribution plans, two additional issues should be included in the agreement. The first is outstanding loans. A loan against the account reduces the balance available for division, and if the agreement is silent, the alternate payee may absorb the cost of the participant’s borrowing without realizing it. The second is gains and losses. There is often a gap between the valuation date in the agreement and the date the account is segregated. The market moves in that window. The agreement should specify whether the alternate payee shares in investment gains and losses during that period, or whether their share is fixed at the valuation date amount. Silence on either point creates disputes.
For IRAs, the separation agreement should identify the specific account by institution and account number, specify the dollar amount or percentage being transferred, and confirm the transfer will be structured as a transfer incident to divorce. If the IRA being divided is a Roth, the agreement should explicitly state so, since the tax treatment and transfer mechanics differ from those of a traditional IRA.
Timing Is Not an Administrative Detail
The most consequential error in retirement order practice is treating the order as something to handle after everything else is done. Until the order is accepted by the plan, the alternate payee has no enforceable right against the plan itself. The participant can retire, take loans, change beneficiaries, or die in the gap between decree and plan acceptance, and the alternate payee’s position may be significantly or irreparably compromised as a result.
Start the DRO process before or concurrently with the decree. In the meantime, the separation agreement should be doing some of that protective work. Include provisions restricting the participant from taking loans or withdrawals, requiring the participant to maintain survivor benefit coverage, and obligating the participant to cooperate with plan submission. These provisions do not replace the order, but they give the alternate payee recourse if the participant acts in bad faith during the gap.
Referring Out Does Not Close the File
Many family law attorneys refer DRO drafting to another attorney who regularly handles these orders, and that is a reasonable practice. What it does not do is transfer your responsibility to the client. You are still responsible for correctly structuring the underlying agreement, advising your client on their rights, and following up to confirm that the order was submitted and accepted. Referring to the drafting is not the same as closing the file.
The finish line is plan acceptance, not the court’s signature. Follow up with the plan to confirm the order was received, reviewed, and accepted. Obtain written confirmation. If the plan rejects the order, find out why and address it promptly. A signed order sitting in a file drawer that the plan has never seen is not a completed retirement division.
Jessica Zadjura is a Maryland family law attorney, mediator, and parent coordinator with 15 years of experience. She is the founder of Zadjura Family Law LLC, serving clients across Howard and Anne Arundel Counties.
