Dividing Retirement Accounts in a Florida Divorce: Marital Portions, QDROs, and IRA Transfers

For many couples in Northeast Florida, the 401(k) is worth more than the equity in the house. Dividing it correctly takes two separate steps: a Florida law question (how much of the account is marital) and a federal law question (what paperwork actually moves the money without a tax hit). A settlement that gets the first step right and the second step wrong can cost one spouse thousands of dollars.

Step one: what part of the account is marital

Section 61.075(6)(a)1.e. defines marital assets to include all vested and nonvested benefits, rights, and funds accrued during the marriage in retirement, pension, profit-sharing, annuity, deferred compensation, and insurance plans and programs. Section 61.076(1) repeats the same rule specifically for retirement plans.

Two phrases in that definition matter.

"Vested and nonvested." An unvested employer match or pension benefit earned during the marriage is still a marital asset. The fact that it could be forfeited if the employee leaves next year affects how it is valued and divided, not whether it is marital.

"Accrued during the marriage." Contributions made before the marriage, and growth on them, are generally nonmarital under section 61.075(6)(b), which covers assets acquired before the marriage and income derived from nonmarital assets unless it was treated, used, or relied on as marital. On the other side, section 61.075(6)(a)1.b. makes the enhancement in value of a nonmarital asset marital to the extent it resulted from marital efforts or marital contributions. A premarital 401(k) that kept receiving payroll contributions throughout the marriage will usually be part marital and part nonmarital, and separating the two requires statements from the date of marriage forward.

The end of the marital period is set by section 61.075(7): the earliest of a valid separation agreement, a date that agreement sets, or the filing of the petition for dissolution. Contributions after that cut-off date are not marital. Valuation dates are a separate question the court decides based on what is just and equitable, and the court may use different dates for different assets.

Once the marital portion is identified, the court starts from the premise that marital assets are divided equally, unless there is a justification for an unequal distribution under the factors in section 61.075(1). Our page on equitable distribution covers those factors.

Step two: moving the money

Here is where federal law takes over. Private employer plans such as 401(k)s, 403(b)s, and traditional pensions are governed by ERISA, and ERISA requires every pension plan to provide that benefits may not be assigned or alienated (29 U.S.C. § 1056(d)(1)). A Florida divorce judgment that simply says "the wife gets half the 401(k)" does not, by itself, get the plan administrator to pay anyone.

The exception is the qualified domestic relations order, or QDRO, defined in 29 U.S.C. § 1056(d)(3) and in the parallel tax provision, 26 U.S.C. § 414(p). A QDRO is a domestic relations order that creates or recognizes an alternate payee's right to receive all or part of a participant's benefits under a plan. The alternate payee may be a spouse, former spouse, child, or other dependent.

What the order must contain

To qualify, the order must clearly specify:

• the name and last known mailing address of the participant and each alternate payee;
• the amount or percentage of the participant's benefits to be paid to each alternate payee, or the manner in which that amount or percentage is to be determined;
• the number of payments or period to which the order applies; and
• each plan to which the order applies.

What the order cannot do

A QDRO cannot require the plan to provide any type or form of benefit it does not otherwise offer, cannot require increased benefits, and cannot require payment of benefits already assigned to another alternate payee under an earlier QDRO. A divorce settlement that promises a lump sum from a pension that only pays annuities is a settlement that cannot be carried out.

The plan administrator decides

Under 29 U.S.C. § 1056(d)(3)(G), the plan administrator must notify the participant and alternate payee when it receives an order and must determine, within a reasonable period, whether the order is qualified. Many plans publish model QDRO language and will review a draft before it is entered. Getting the draft pre-approved before the judge signs it avoids the cycle of entering an order, having the plan reject it, and returning to court in Duval, Clay, Nassau, or St. Johns County to amend it.

The QDRO is often treated as an afterthought, prepared months after the final judgment. That is a mistake. Market swings, a participant's withdrawal, or a participant's death in the interim can all complicate a division that was never formalized.

The 10 percent early withdrawal exception

Distributions from a qualified retirement plan before age 59 1/2 are generally subject to a 10 percent additional tax under 26 U.S.C. § 72(t)(1). Section 72(t)(2)(C) excepts any distribution to an alternate payee pursuant to a QDRO.

That exception creates a planning opportunity. An alternate payee spouse who needs cash to buy out the house or cover moving costs can take part of the award directly from the plan under the QDRO without the 10 percent additional tax. Ordinary income tax still applies to the distribution. Once the funds are rolled into the alternate payee's own IRA, the exception is gone.

IRAs are different

An IRA is not an ERISA plan, and it is not divided by QDRO. Under 26 U.S.C. § 408(d)(6), the transfer of an individual's interest in an IRA to a spouse or former spouse under a divorce or separation instrument is not a taxable transfer, and the transferred interest is treated from then on as the receiving spouse's IRA.

The mechanics matter. The transfer should go directly from the account owner's IRA to an IRA in the receiving spouse's name, under the terms of the judgment or settlement agreement. A withdrawal by the owner followed by a check to the other spouse is a taxable distribution to the owner, and may carry the 10 percent additional tax as well.

The QDRO early withdrawal exception also does not help with IRAs. Section 72(t)(3)(A) provides that the exception in paragraph (2)(C) does not apply to distributions from an individual retirement plan. An ex-spouse who receives an IRA by transfer and then withdraws from it before 59 1/2 generally faces the additional tax.

Government plans and military retired pay

ERISA does not apply to governmental plans (29 U.S.C. § 1003(b)(1)), so Florida Retirement System benefits, federal civilian retirement, and other public plans are divided under their own statutes and their own order requirements. Section 414(p)(11) of the tax code extends QDRO tax treatment to distributions from governmental plans and 457(b) plans made under a qualifying domestic relations order, but the order itself must satisfy the specific plan's rules.

Military retired pay is its own category entirely, with federal requirements that section 61.076(2) and (3) build into Florida judgments. We cover it in detail in our post on dividing military pensions in a Florida divorce.

The takeaway

Identify every retirement account, classify each one as marital, nonmarital, or mixed, and document the classification with statements. Then match each account to the right transfer mechanism: QDRO for ERISA plans, transfer incident to divorce for IRAs, and plan-specific orders for government and military benefits. The division is only as good as the paperwork that carries it out.

Steven C. Fraser, Esq., Florida Bar No. 625825, Florida Supreme Court Certified Family Mediator No. 37256 CFR. Jacksonville, Florida. 877-862-7188.