Qualified Retirement Plans vs. Non-Qualified Retirement Plans

Walters Gilbreath, PLLC

Retirement Plans are often divided in divorces. Whether you have a retirement plan that you want to protect in your divorce, or whether you believe that you should receive part of your spouse’s retirement plan, you will need to learn about the difference between a Qualified and Non-Qualified Retirement Plan. If you are going through a divorce, the division of your assets will be important. Major assets such as your home and business will be divided in your divorce, and you need to know what you and your spouse are entitled to receive.

In this blog series, I will discuss:

  • Types of retirement plans. Understanding what plan you have can help you protect it.
  • Common division issues. Knowing what you’re up against will help you prepare.
  • The QDRO and DRO. This information will familiarize you with division orders.
  • 401(k) plans and what happen to them in divorce.
  • In this article, I will begin by discussing a few different types of retirement plans, including qualified plans and non-qualified plans.

Qualified vs. Non-qualified Retirement Plans

Retirement Plans can be placed into two categories : qualified and non qualified plans. A retirement plan constitutes a qualified plan when it meets the requirements of ERISA and the Internal Revenue Code (IRC). The two major types of qualified plans include defined contribution and benefit plans.
On the other hand, sometimes employers give these plans to their executives that otherwise receive high compensation. You can identify most non-qualified plans by the language of the plan. Oftentimes these plans include words such as:

  • Supplemental;
  • Bonus;
  • Excess; or
  • Executive.

Though this list includes some of the common words that you may see, sometimes the plans use different wording.

In addition, non-qualified plans do not comply with ERISA and usually won’t accept a division order such as QDRO. This means that most non-qualified retirement plans will not be subject to division in your divorce. Government plans at the local, state and federal level also won’t comply with ERISA, but some might still be subject to division orders.
Understanding if you or your spouse has a qualified or non-qualified plan is important and should be one of the first things you do when considering retirement plans in divorce. If you or your spouse has a non-qualified plan, this will likely not get affected in the divorce.

Defined Contribution Plans

There exist many different types of defined contribution plans. Some common ones include:

  • The 401(k) savings plan.
  • Federal Thrift Savings Plan.
  • SEP.
  • SIMPLE.403(b) plan.457(b) plan.

This type of plan is typified by an actual account containing the contributions of the participant, matching contributions of an employer, and gains or losses of the investments of contributions.
Generally, defined contribution plans can get divided in a divorce. This can be by a specific dollar amount or a specific percentage. Moreover, division of this type of plan usually deals with the gains and losses in the plan. When going by a percentage, gains and losses are usually included in the division. On the other hand, this generally won’t happen when using a specific dollar amount in the division of the plan. These types of plans are usually complicated and will need to be interpreted. Contact an experienced attorney for more guidance with identifying your (or your spouse’s) plan.

Defined Benefit Plans

There are two types of Defined Benefit Plans : one with a traditional pension and one with a cash balance pension. The traditional pension defined benefit plan gives a monthly benefit that is paid upon retirement. Valuation of this type of plan usually requires the help of an actuary. An actuary is just a business professional that analyzes the measurement and management of risk and uncertainty. Though an actuary can be helpful, this type of benefit can generally just get divided based on a percentage instead.

Many people will have both a traditional pension plan and a cash value pension plan. The terms for dividing a cash value pension plan will vary. The pension is awarded upon retirement, but some plans allow for it to be given in a lump sum while others give a monthly amount. The individual terms of your cash value pension plan will determine how it is divided in your divorce.

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