A federal law called the Employee Retirement Income Security Act (ERISA) governs how to divide certain types of retirement benefits upon divorce. ERISA applies to employer-provided retirement benefits. There are two types of employer-provided retirement benefits. First is the defined benefit plan, which is the traditional pension. A defined benefit plan pays the retiree a specific amount per month during retirement. The other type of employer-provided benefit plan is the defined contribution plan. In this type of plan, the employer, employee or both make contributions to the plan. Some of the more common types of defined contribution plans are 401(k) plans, 403(b) plans, employee stock ownership plans and profit-sharing plans.
To divide an employer-provided retirement plan upon divorce, ERISA requires courts to use a specific type of court order called a Qualified Domestic Relations Order. QDRO appoints the non-employee spouse as an alternate payee of the retirement plan. The QDRO must identify the parties and state their addresses, retirement plan to which it applies, amount in dollars or percentage of retirement plan being awarded to non-employee spouse, and number of payments or time period involved. The QDRO becomes qualified when the administrator of the retirement plan confirms the QDRO meets the requirements of the retirement plan.
When dividing defined contribution retirement plans, courts generally divide only what was contributed to them during the course of the marriage, excluding any assets in the plan provided by a spouse prior to marriage. Dividing defined benefit plans -- in other words, pensions -- is more difficult because pension benefits can build up unevenly over the duration of the spouse's employment and usually are not payable until sometime in the future because the spouse has not yet retired. In such cases, the courts attempt to calculate a fraction of the pension to divide based on how long the parties were married as compared with how long the employee spouse worked, and will work, to earn the pension.
At times, divorce courts will not divide employer-provided retirement plans. This can occur when each spouse has his own employer-provided retirement plan and the court awards each spouse his own. As another example, a court may allow one spouse to keep his employer-provided retirement plan and make up its value to the other spouse by awarding her other marital assets. Finally, if a retirement benefit is not employer-provided -- for example, when an individual creates and funds his own IRA -- ERISA does not apply and no QDRO is necessary to divide the retirement benefit.