In a divorce there is no single best way to divide a pension. In a given case, the division depends upon the type of pension plan, the nature of the participant’s pension benefits, and the reason the parties are dividing them.

In dividing a pension, the parties must consider two elements of a participant’s pension benefits: the retirement benefit paid directly to the participant for retirement and any survivor benefit paid under the plan on behalf of the participant to someone else after the participant dies.

The alternate payee can be awarded some or all of the pension benefits payable under a pension plan, but the QDRO cannot require the plan to provide increased benefits, nor can a QDRO require a plan to provide a type or form of benefit not otherwise provided under the plan. When a participant has had two spouses, for example, a QDRO also cannot provide benefits to one alternate payee that are paid to another alternate payee under another QDRO already recognized by the plan.

The reasons for dividing the pension benefits are important. Generally, a QDRO effects temporary or permanent support payments to the alternate payee, who is usually the spouse or former spouse but may be a child or other dependent of the participant, or it brings about the division of marital property in a divorce. Differing goals demand differing approaches; usually, the parties use either a shared payment or a separate interest model.

The shared payment model splits the benefit payments to give the alternate payee part of each payment. Under this regime, the alternate payee does not receive payments unless the participant receives a payment or is already in pay status. This approach is often used when a QDRO is being drafted after a participant has begun to receive a stream of payments from the plan, such as a life annuity.

A shared payment QDRO must specify the amount or percentage of the participant’s benefit payments assigned to the alternate payee or the manner in which such amount or percentage is calculated and the number of payments or period to which it applies. In the shared payment QDRO, the duration is particularly important; the order must specify when the alternate payee’s right to share the payments begins and ends. For example, a child support QDRO might require payments to the alternate payee that begin immediately and continue until he or she reaches maturity. A spousal support QDRO may stipulate that payments to the alternate payee end when he or she remarries. If payments end upon the occurrence of an event, notice and reasonable substantiation must be provided for the plan to comply with the terms of the QDRO.

A separate interest QDRO, on the other hand, divides a pension as marital property upon divorce or legal separation. These orders usually divide the participant’s retirement benefit into two separate accounts to give the alternate payee a separate right to a share of the retirement benefit to be paid at a time and in a form different from that chosen by the participant.

Like the shared payment routine, a separate interest QDRO specifies the amount or percentage of the participant’s retirement benefit to be assigned to the alternate payee or how such amount or percentage is to be calculated and the number of payments or period to which it applies. These orders often give the alternate payee the same right that the participant had to elect the form of benefit payment and the time at which the separate interest is paid.

Attorneys and clients must decide how best to achieve the purposes of the pension division. Federal law does not require the use of either approach for any specific domestic relations purpose. Moreover, the shared payment approach and the separate interest approach can be used for either defined benefit or defined contribution plans. However, it is important that any order follows the terms of the plan, for example, a QDRO requiring a plan to provide increased benefits as a type or form of benefit, or an option, not otherwise available cannot be approved.

Pension authority Anne E. Moss, J.D., author of Your Pension Rights at Divorce, suggests that to divide a pension intelligently the non-participating spouse must find out “what kind of pension it is, how it is funded, and how it pays out.” Several points must be considered before a divorce is final.

Dr. Moss states that a non-participating spouse should know if their spouse has more than one pension or retirement plan from his or her current or any previous job. The spouse may be eligible for – indeed he or she may already be receiving– retirement benefits from any current or previous employer, for example, a company pension and also a 401(k) plan. For a non-participating spouse to receive his or her fair share, the marital settlement must refer to each plan in order. Both types of plans can be divided at divorce.

In general, the spouse who has worked five years has enough service to earn a legal right to the pension; however, if the spouse has worked for the federal, state, or local government, the non-participating spouse needs to learn the different rules that apply to those types of pensions.

An attorney can write to the pension plan administrator to get a copy of the most recent annual benefit statement; that is, how much he or she has accrued in pension benefits under each plan. The attorney can ask the court to order the plan to furnish one and request a summary plan description (SPD), which describes the key features and rules of the plan as well as any cost of living adjustments.

A pension may be worth more or is more complicated than the amount that appears on the annual statement. Normally, as part of preparation of a QDRO, a pension actuary or an accountant appraises the lump sum present value of the monthly pension.

The court order dividing a pension plan is often a Qualified Domestic Relations Order (QDRO). The QDRO must clearly specify what is to be paid to the non-participant. The amount can be stated as a fraction or percentage of the pension. It can be based on the total benefit earned as of the separation date, the date of divorce, the date he or she is eligible for retirement, or the date he or she retires. Most pensions provide for survivor benefits, so that the non-participant spouse’s benefits can continue if his or her ex-spouse dies first. Traditionally, company pension plans provide a survivor’s benefit of 50 percent of the amount the participant received. Non-participant ex-spouses can receive these benefits, but they must be specifically included in the order, or the benefits may stop when the participating ex-spouse dies.

When spouses agree to divide an IRA account, they need a Property Settlement Agreement or court order stipulating the amount to be transferred. IRAs are not subject to the anti-alienation requirement of ERISA. Thus, QDROs are not needed to divide IRAs, even if the IRA is a rollover IRA from a qualified retirement plan. IRA Funds transferred from one spouse to another under a court order as part of a settlement can be made without tax penalties because they are the recipient-spouse’s property. The transfer is tax-free.

The IRS also offers two basic transfer methods for divorcing couples.

One, and the most common method, is the “direct transfer.” The IRA owner-spouse orders the IRA trustee to transfer the required IRA assets directly to the trustee of a new or existing IRA in the name of the recipient-spouse. Two, is called the “renaming method,” which is the transfer of assets the owner-spouse is entitled to keep to another IRA, leaving the necessary amount in the old IRA for the recipient-spouse, and changing the name on the old IRA to that of the recipient. A final alternative under the renaming method comes in handy if all the assets in the owner-spouse’s IRA are to be transferred to the recipient-spouse. A simple method of transfer is to just change the name of the account on the records of the financial institution.

When transferring IRA assets in a brokerage account as part of divorce, it is a good idea to inquire about specific paperwork for the transfer as well as any specific language and protocols in the agreement to facilitate this transfer.

The IRA custodian classifies the movement as either a transfer or a rollover, depending on the circumstances of the division and how the decree is worded.

The recipient owns the assets when the transfer is complete and assumes sole and total responsibility for the tax consequences of any future transactions or distributions. This means that if a husband gives half of his IRA to a soon-to-be-ex-wife in the form of a properly labeled transfer incident to divorce, she pays the tax on any distributions she takes out of the account after she receives the funds. The husband owes nothing because he followed the IRS rules for transfer incidents.

An improper division means the owner will owe both tax and an early withdrawal penalty, if applicable, on the entire amount that the ex-spouse received. To avoid this, use both the division percentage breakdown and the dollar amount of IRA assets being transferred, as well as all the sending and receiving account numbers for all of the IRAs involved in the transfer.

Making use of a revocable interest with a QDRO. This regime can be used to fund alimony agreements, provide for child support payments, provide for security interests or provide for a limited number of benefit payments.

Most QDROs stipulate the terms and conditions of an outright, unconditional assignment of present or future monetary interests in the participant’s benefits to an alternate payee in exchange for his or her marital property rights.

Under the Internal Revenue Code, the term assignment includes any direct or indirect arrangement (whether revocable or irrevocable) whereby a party acquires from a participant or beneficiary a right or interest in a plan or any part of a plan benefit payment payable to the participant or beneficiary. A revocable assignment is an assignment providing that the assignment of benefits terminates or changes in time or the happening of some defined event.

Traditionally, QDROs involving defined benefit plans (DB plans) assign separate interest or stream of interest benefits to an alternate payee that are permanent and nonrevocable interests. The benefits are normally payable for the life of the alternate payee. When the alternate payee dies the benefits cease and the participant’s benefits continue at the reduced rate.

In the case of alimony, when a DB plan is in or near pay status, an assignment of an interest can serve as a funding vehicle for or a substitute for alimony, which converts the alimony from an unsecured order or promise to pay into a guaranteed order. Although uncommon, there is no prohibition that prevents an interest to an alternate payee from terminating upon the death of the alternate payee or any other contingency, such as the remarriage of the former spouse. In order for an assignment of this type to work, however, the assignment must be a stream-of-payments interest, that is, the payments do not begin to the alternate payee until the participant receives benefits. The alternate payee cannot make any elections under the plan. The happening of the first of any contingency in the order or agreement terminates the payments and the benefits “pop-up” to the participant.

Sometimes couples negotiate limited payments payee contingent upon the death of the alternate payee. The assigned interest takes a stream-of-payments benefit, that is, they do not begin until the participant begins receiving benefits, and he or she is not allowed to make any elections under the plan. For example, when it is likely that the participant will outlive the alternate payee by a number of years, an interest in the participant’s plan can be assigned to an alternate payee contingent upon the alternate payee’s death. The assigned interest takes a stream-of-payments benefit, that is, it does not begin until the participant begin receiving benefits, and he or she is not allowed to make any elections under the plan. When the death contingency takes place, the payments would “pop-up” to the participant. This type of arrangement could be used as a substitute for a short-term alimony arrangements where funding of the alimony is guaranteed by the plan. Under this type of arrangement, the defined benefit plan must be near or in pay status.