Division of Retirement Accounts in a Virginia Divorce
Virginia is an “equitable distribution state,” which means that in any divorce proceeding, a circuit court is permitted to classify parties’ properties and debts as either separate property, marital property, or a hybrid property (consisting of both separate property and marital property funds). Once the circuit court classifies the parties’ properties and debts, then the court is authorized under Virginia law to divide these assets and debts accordingly.
One such type of marital asset that a Virginia circuit court will divide is any retirement accounts titled in either party’s name. In Virginia, the division of a retirement account shall not exceed fifty percent (50%) of the marital share. Under Virginia law, the marital share is is defined as the portion of the total interest that was earned during the marriage until the parties’ date of separation.
What Types of Retirement Accounts are Common in a Divorce?
If you are contemplating or going through a divorce, it is important to understand what kinds of retirement accounts may be involved in your divorce. Below is a list and description of some of the more common types of retirement accounts that you or your spouse may have:
401(k) Plans. The most common retirement account is a 401(k) plan. This type of retirement account is known as a defined contribution plan, which allows employees to invest or choose their own retirement investments. With this plan, contributions are made by an employee from the employee’s paycheck. Additionally, some employers proportionately match an employee’s contribution up to a certain percentage.
403(b) Plans. If you are employed by a public school, college, university, church, other religious organization, or a nonprofit organization, your employer may have a 403(b) plan. Like with a 401(k) plan, employees may make contributions to the account out of their paycheck and an employer may match an employee’s contribution up to a certain percentage.
Individual Retirement Account (IRA). An individual retirement account (IRA) is a savings account that a person may open without an employer in order to contribute money for investment or retirement purposes with a brokerage firm. With an IRA, a person deposits funds into the IRA to purchase a variety of investments, such as stocks, mutual funds and bonds. A person may contribute to an IRA in addition to an employer-provided 401(k) plan, 403(b) plan or pension.
The two most common types of IRAs are the traditional IRA and the Roth IRA. A traditional IRA allows a person to get the benefit of tax-deferred investment growth because contributions are deductible in the year they are made. In turn, any withdrawals or distributions from the traditional IRA are subject to federal income tax in the year the withdrawal is made. In contrast, a person who has a Roth IRA does not receive any deductions (or are not tax-deductible) from making contributions in a given year. Rather, withdrawals are tax free under certain conditions, such as when a person withdraws only the principal portion of the account and not any portion of accrued interest or growth.
Pension Plans. Pensions, also known as a defined benefit plan, guarantees that an employee will receive a certain amount of monthly income upon retirement based on eligibility requirements provided for by an employer. With a pension plan, an employee or employer makes contributions to an investment or brokerage account that is completely controlled by the employer. In exchange for making these contributions, the employer agrees to provide a certain monthly income to its retired employees based on the amount the employee has contributed and the number of years the employee worked for the employer.
Federal Civil Service Pension. Effective January 1, 1987, the retirement system for employees within the United States civil service is called the Federal Employees Retirement System (FERS). FERS consists of three (3) components: (i) the Basic Benefit Plan; (ii) Thrift Savings Plan; and (iii) Social Security. For more information about FERS, see Federal Retirement Division in Virginia Divorce.
Military Pension. If a spouse is a current or retired active duty servicemember or reservist, he or she may qualify to receive a pension, based on the number of years of service. If the spouse was married during all or some of his or her years of service, then the other spouse is entitled to up to fifty percent (50%) of the marital portion of the pension. The laws and regulations regarding the division of a military pension are complex. Congress recently enacted the National Defense Authorization Act (NDAA), which drastically changed the way military retired pay may be divided in divorce cases by revising the Uniformed Services Former Spouse Protection Act (USFSPA). Enacted in 1982, the USFSPA authorizes states to divided military retired pay as marital property in a divorce action. For more information about the NDAA, see Major Changes to Federal Law on Dividing Military Retired Pay.
What is the Process for Dividing Retirement Accounts?
Qualified Domestic Relations Orders
In order for a court to divide a 401(k) plan or 403(b) plan, a circuit court must enter a Qualified Domestic Relations Order (QDRO). With a QDRO, the court is authorizing an employer to award an ex-spouse his or her share of the other spouse’s retirement account pursuant to a circuit court’s ruling and/or the parties’ separation agreement. As with a 401(k) or 403(b) plan, a QDRO is required to divide a civilian or employer-provided pension in a divorce. Each 401(k), 403 (b) or pension plan administrator has its own rules and requirements governing the contents of a QDRO in order to ensure the QDRO comports with the Employee Retirement Income Security Act of 1974, commonly known as ERISA. Given the variation involved from plan administrator to plan administrator, it is important to obtain and understand those rules and requirements prior to entering into a separation agreement or having a circuit court make an equitable distribution ruling.
Transfer Incident to Divorce
In order to divide an IRA, a court does not need to enter a QDRO. Instead, the IRA custodian or company is able to divide a party’s IRA according to a parties’ separation agreement or a Final Order of Divorce. This transfer may occur by transferring a fixed dollar amount or percentage of the spouse’s IRA to the other spouse’s IRA (known as a rollover) or by the other spouse establishing a new IRA in order for the transfer to occur. Once the rollover or transfer occurs, the other spouse takes legal ownership of the funds deposited into his or her IRA and assumes any tax consequences for any future transactions or distributions. It is important to note in any separation agreement and/or Final Order of Divorce that this rollover/transfer is a trustee-to-trustee transfer incident to a divorce. Otherwise, the spouse with the IRA from which funds are being withdrawn will owe both tax and an early withdrawal penalty, if applicable, on the entire amount that the other spouse receives.
Dividing FERS Pensions, Thrift Savings Plans (TSPs), and Military Retired Pay
In order to divide a FERS pension, a Court Order Acceptable for Processing must be submitted to the Office of Personnel Management (OPM). To divide a TSP, a Retirement Benefits Order must be submitted to the Federal Retirement Thrift Investment Board (FRTIB). Finally, to divide a servicemember’s military retired pay, an Order for Military Retired Pay must be submitted to the Defense Finance and Accounting Service (DFAS). A circuit court must first sign each of these types of orders after or simultaneously with entry of a Final Decree of Divorce. Once this occurs, the order may be submitted to the appropriate agency. Each of these orders have very specific rules and regulations as set forth under federal law. It is important that any of these orders you submit to the circuit court for entry comply with the rules and regulations governing your spouse’s retirement account.
Contemplating divorce, while also trying to plan for one’s financial future and retirement, can seem overwhelming. Having an experienced family law attorney on your side can give you peace of mind, and help secure your financial future. Livesay & Myers, P.C. has a team of experienced family law attorneys in Northern Virginia. Contact us to schedule a consultation today.