QDROs and dividing retirement plans: the order is the division.

Plan by plan: which order divides what.

Before anyone agrees to a percentage, the first question is what kind of plan it is. The plan type decides the instrument, the law that governs it, and what can go wrong.

Nine kinds of plan, and the order each one needs.

The marital share: the time rule for a pension.

A retirement benefit is marital to the extent it was earned during the marriage, and a vested but unmatured pension is marital property to the extent it was funded during the marriage (In re Marriage of Grubb, 745 P.2d 661 (Colo. 1987)). How the share is measured depends on whether the plan promises a benefit or holds an account.

Defined benefit pensions: the three methods of Hunt.

Offset the present value now, divide each payment later by the time rule, or reserve jurisdiction; once the time rule is used, the fraction cannot be altered.

In In re Marriage of Hunt, 909 P.2d 525 (Colo. 1995) the Supreme Court set out three methods. Immediate offset: an actuary fixes the present value of the marital share, priced for the risk of forfeiture, and the other spouse takes equal value in other assets; it suits a small pension or a clean break. Deferred distribution: the court predetermines the percentage of each payment the other spouse will receive once the pension is vested and matured. Reserved jurisdiction: the court decides later.

The time rule. Marital months of service over total months at retirement, times the monthly benefit, times one-half. Under deferred distribution the economic partnership continues, so later increases and decreases are shared, and once used the formula cannot be altered for “economic fault.” The Court of Appeals calls the coverture fraction the accepted means (In re Marriage of Zappanti, 80 P.3d 889 (Colo. App. 2003)), and disapproved a subtraction method for a pension because it grossly overstated the wife’s share (In re Marriage of James, 950 P.2d 624 (Colo. App. 1997)).

Worked: the time rule.

The premarital 401(k): the balance is separate, the growth is not.

For an account the statute does the work: an asset acquired before the marriage is marital to the extent its present value exceeds its value at the time of the marriage (C.R.S. § 14-10-113(4)).

Subtraction, not growth-tracing.

The balance on the wedding day is separate; everything above it at the decree, including the growth on those premarital dollars, is marital.

The cases. The amount accumulated before the marriage is separate property (In re Marriage of Rogers, 709 P.2d 1383 (Colo. App. 1985)). A 401(k) is a defined contribution plan whose marital interest the court must determine but, unlike a pension, it need not consider future appreciation (In re Marriage of Casias, 962 P.2d 999 (Colo. App. 1998)). The Court of Appeals applied the statute to a premarital retirement account as a whole, with no error in using the change in the whole account rather than tracing security by security (In re Marriage of Powell, 220 P.3d 952 (Colo. App. 2009)).

The proof. The spouse claiming the premarital balance carries the burden of tracing it back to the original asset, and the statement nearest the wedding date decides most of these claims. Plans purge old records, so I request it in the first month of the case.

Worked: the premarital 401(k).

What a QDRO must say: the statute, clause by clause.

A domestic relations order is a judgment, decree or order under state domestic relations law that relates to support or marital property rights (29 U.S.C. § 1056(d)(3)(B)(ii)). It becomes a QDRO when the plan administrator finds that it meets the statute, which the tax code repeats at § 414(p).

The statute, and the clause that answers it.

Separate interest or shared payment, survivors, subsidies and increases.

The form of the award decides when the former spouse is paid and whether the payments survive the participant.

Separate interest or shared payment. A separate interest divides the benefit itself: the former spouse chooses when and how to be paid, on the former spouse’s own life. A shared payment is a percentage of each payment the participant receives, and stops when those payments stop. Before retirement, where the plan allows it, I prefer the separate interest.

Survivor benefits, and timing. Leave survivor protection out of the order and the pre-retirement death benefit is lost. In Hopkins v. AT&T Global Information Solutions Co., 105 F.3d 153 (4th Cir. 1997) the surviving-spouse benefits vested in the participant’s current spouse when he retired, and a later order could not move them. A Labor Department regulation lets an order qualify whenever it is issued, even after death (29 C.F.R. § 2530.206(c)(1)), but it cannot take back a benefit that has vested in someone else.

Subsidies and increases. An early-retirement subsidy is excluded unless the order reallocates it. A percentage of each payment carries later increases; a fixed dollar amount does not, unless the order says so.

Account orders: gains, losses, loans, death and cost.

An account is valued at the decree, but the plan divides it weeks or months later. The order says who carries the market in between.

Worked: gains and losses before the money moves.

Loans, later contributions, death. The order decides whether an outstanding loan counts in the balance; contributions after the valuation date are the participant’s. A participant who dies, retires or cashes out before an order is qualified can defeat an award that existed only in the decree, so the order is entered with the decree and pre-approved where the plan allows.

Cost and beneficiaries. A defined contribution plan may charge the reasonable cost of a QDRO determination to the participant’s account. Typical drafting fees run about $500 to $1,500 per plan, and an actuary’s present-value report about $300 to $1,500 or more: typical ranges, not quotes. After the decree every beneficiary designation is changed; for an ERISA plan the plan’s documents control over state revocation rules (Egelhoff v. Egelhoff, 532 U.S. 141 (2001); Kennedy v. Plan Administrator for DuPont, 555 U.S. 285 (2009)), and elsewhere Colorado revokes a former spouse’s designation unless an instrument, order or contract says otherwise (C.R.S. § 15-11-804(2)(a)).

IRAs: no QDRO, and no penalty exception.

An IRA transferred to a spouse or former spouse under a decree, or a written instrument incident to one, is not a taxable transfer and becomes the recipient’s account (§ 408(d)(6)). The transfer is made after the decree, not under temporary orders, by retitling or a trustee-to-trustee transfer (IRS Pub. 590-A).

Worked: cash under the QDRO, or cash from the IRA.

Taxes and support. A former spouse paid under a QDRO is taxed on it (§ 402(e)(1)(A)); how the Roth five-year clock runs after a divorce transfer is unsettled, so keep the original owner’s records. For child support, earnings in a retirement account are not income until distributed, and a penalty-free distribution a parent chooses not to take counts only if the parent is not otherwise employed full time and the account was not received in the division of marital property (C.R.S. § 14-10-115(5)(a)(II)(E)). The maintenance statute’s parallel provision (C.R.S. § 14-10-114(8)(c)(II)(E)) lacks that last carve-out. The tax side of every account is on Divorce & Taxes.

Colorado PERA: a written agreement, on PERA’s forms, in ninety days.

A Colorado public-employee benefit is divisible directly by the plan only upon the parties’ written agreement (C.R.S. § 14-10-113(6)(a)(I)), submitted within ninety days after the decree (C.R.S. § 14-10-113(6)(c)(I)). Without it, a court has no jurisdiction to enter an order dividing the benefit (C.R.S. § 14-10-113(6)(f)).

PERA’s rules, and what each one means.

Without an agreement, and after retirement.

No agreement means no order against PERA; the court can still order the member to pay, and only the court can change a retiree’s cobeneficiary.

No agreement. Without a signature there is no order against PERA, but the court can offset the value in other assets, or order the member to pay the other spouse as each retirement check arrives, on the Hunt deferred-distribution method (In re Marriage of Tagen, 62 P.3d 1092 (Colo. App. 2002)). A missed ninety-day deadline leaves the same fallback, or vacating and re-entering the decree.

The retiree’s cobeneficiary. The court may order or allow a retiree to change or remove a cobeneficiary; the Supreme Court held that the authority belongs to the trial court, not the retiree, and that the court is not required to permit the change (In re Marriage of Mack, 2022 CO 17).

FERS, CSRS and the TSP: two orders, two agencies.

A federal employee usually has two benefits and needs two orders: one to the Office of Personnel Management for the annuity, one to the Thrift Savings Plan for the account. Neither agency accepts an order written for a private plan.

Two federal orders, compared.

Military retired pay: federal law first.

A state court may treat disposable retired pay as marital property (10 U.S.C. § 1408(c)(1)) only with jurisdiction over the member through residence not due to a military assignment, domicile, or consent (§ 1408(c)(4)). Federal law then decides how much is divisible, who pays it, and what survives.

The frozen benefit. For a decree that becomes final before the member retires, the pay to be divided is “the amount of retired pay to which the member would have been entitled using the member’s retired pay base and years of service on the date of the decree,” increased by the cost-of-living adjustments before and after retirement; for a reservist, the pay base and service points on the decree date (§ 1408(a)(4)(B), added for decrees after December 23, 2016). The order recites the member’s high-3 pay base and years of service, or points, as of the decree, in the form DFAS publishes. I have found no Colorado appellate decision applying the rule; the statute controls.

Military pay: the federal rules.

Worked: what the frozen-benefit rule did.

VA disability. A state court may not order a veteran to indemnify a former spouse for retired pay later waived to receive VA disability (Howell v. Howell, 581 U.S. 214 (2017)), and the Court of Appeals held equitable reimbursement preempted too (In re Marriage of Tozer, 2017 COA 151). A court may still account for a possible waiver in setting spousal support, and VA disability benefits are income for child support (In re M.E.R-L., 2020 COA 173). The risk is priced at the decree.

The order of operations, and the deadlines.

1. First month
   Plan procedures and statements.

   Each plan’s procedures and model order; current statements; the wedding-date statement; PERA service credit; the military pay base and service.

2. Before the decree
   Draft, and pre-approve.

   Each order drafted in its plan’s own form and sent for pre-approval where the plan offers it; the PERA forms signed.

3. At the decree
   Enter the orders with it.

   The QDROs and the federal orders entered with or before the decree; the PERA Agreement and Order filed with it.

4. The same week
   Serve certified copies.

   To each plan, OPM, the TSP and DFAS (with DD Form 2293). PERA’s outside limit is ninety days after the decree, and at least 30 days before the first benefit payment.

5. Within a year
   Survivor elections.

   For military pay, the retiree’s former-spouse election within one year after the decree, and the former spouse’s own deemed-election request within one year of the order.

6. Months later
   Qualification and payment.

   The qualification letter within a reasonable period; the TSP pays no sooner than 30 days after its decision letter; DFAS within 90 days if the member is retired.

7. After
   Beneficiaries and the tax.

   New beneficiary designations on every account; cash taken under the QDRO before any rollover; the next return planned with the CPA.

Five things people get wrong.

What to bring, and what to settle first.

What people ask before anyone touches the accounts.

Related: Retirement Assets  ·  Divorce & Taxes  ·  The House & the Buyout  ·  Separate Property  ·  Executive Compensation