What does “half” mean when it comes to QDROs?
There’s a famous intelligence test that is sometimes used in job interviews. You hand the candidate a piece of paper and ask them to divide it in half.
Some candidates will grab the paper and rip into two parts. Other candidates will fold the paper carefully and attempt to get close to a clean 50/50 cut. Some candidates will ask for a pair of scissors. Still others will ask “how do you want me to do it?”
The point is that “half” is open to interpretation—at least when it comes to a piece of paper.
Divorcing couples who are attempting to divide retirement benefits will sometimes agree in principle that each party should get half. But, what does “half” mean when it comes to retirement benefits? As with a piece of paper, “half” of a retirement plan is open to interpretation.
Before agreeing to “half” of your spouse’s retirement plan, here are some things to think about:
- Half of what? Not all retirement plans are created equal. IRAs are different from 401(k)s and 401(k)s are different from annuities and pensions. It’s worth reviewing the retirement plan carefully and being sure you know what kinds of plan it is. Some plans, like IRAs and 401(k)s, are called defined contribution, which means that the participant (and often employer) pays into the plan and a cash balance accumulates. Other plans, like a traditional pension, are called defined benefit, which means that the participant is promised a monthly payment once she retires. Still other plans are essentially hybrids, which vary but often will pay out a monthly benefit upon retirement but also have an accumulating cash balance. Before you agree to half of a plan, it’s important to know if you’re going to get half of defined contribution plan, defined benefit plan, or a hybrid plan.
- Half as in dollars? Or a percent? In the same way that there’s more than one way to cut a piece of paper in half, dividing an account in half may mean that the receiving party gets a dollar amount or a percentage of the account. Both approaches have their advantages and disadvantages.
- Half but as of when? When it comes to defined contribution plans, it may seem that “half” simply means half of the balance in the account. However, there may be delays between the date the parties’ agreed to divide the account in half and the actual date the account is divided. Suppose (through nobody’s fault) it takes a full year for the plan to divide the account. Now the question is: as of when? Because plans are invested in the stock market and go up and down in value, the when makes a difference. In a good market, the party receiving the half would probably want the half as of the agreement so that she gets the positive gains. Likewise, if the market is down, she’d probably want the half as of the date of division so that there are no negative losses.
- Half of which benefits? When people say “half of the plan,” they probably mean half of the main benefit: the cash balance or the monthly payment. But, for many plans, the cash balance and/or the monthly payment is not the only benefit that the participant may receive from the plan. Think of the plan as a bundle of benefits. What does “half” refer to? Which benefits? Perhaps the most classic example is survivor benefits or death benefits. These are additional benefits which are paid out to the spouse or former spouse of the participant upon the participant’s death—and they’re not the only additional benefit available. It’s very important to be clear whether “half” includes these benefits or not.
If you’re working with your spouse to divide retirement benefits, “half” may seem like a fair and equitable solution. But, it’s worth pausing and asking “What does half mean?” If you or your attorney need a QDRO prepared, please call Weinberg & Schwartz.