Distributing Retirement Benefits Upon Divorce
Upon divorce, all debts, property and assets must be divided between the spouses according to applicable percentages set by state law. In equitable distribution states, the court divides marital property (or property acquired during the marriage) according to what is “equitable” or “fair.” In community property states, the court will divide marital property in equal shares, or fifty-fifty. In general, retirement benefits are classified as “property” and are thus subject to division in the event of a divorce.
Defined Benefit Plans
Generally, a “defined benefit plan” is a retirement plan that will provide monthly income benefits which become payable upon retirement. Defined benefit plans use a formula to calculate the retirement allowance based on certain set factors such as age, years of service and salary. As such, these plans are more restrictive. Defined benefit plans are designed to allow for a member to receive their retirement benefits for the rest of their lifetime. They can be in the form of government pensions, union pensions or company pensions.
Defined Contribution Plans
A “defined contribution plan” is a retirement plan that is based on the funds available in the individual’s account. In general, a member makes contributions to their retirement fund, which is sometimes matched by their employer. The return on their investment of contributions will determine the final size of their fund. These plans are more portable than defined benefit plans since employees can rollover their contribution funds into a new employer’s retirement plan. Examples of defined contribution plans include:
- IRAs (“Individual Retirement Accounts”); SEP-IRAs; Educational IRAs; Roth IRAs
- Deferred compensations plans
- Profit sharing plans
- Stock savings plans
State Law Determines How Assets Are Distributed
State law governs the distribution of assets upon divorce. “Marital property” is generally defined as any property that has been acquired by either or both spouses during their marriage. “Separate property” is considered to be the sole property of one spouse and remains undivided on divorce. Equitable distribution states divide marital property “equitably” (fairly) and consider factors such as how long the marriage has lasted, the earnings of each spouse, what each spouse has contributed to the acquired asset.
In contrast, based on the presumption that both spouses have contributed equally to the marriage, community property states divide marital property “equally” (or fifty-fifty). There are only nine community property states including Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington and Wisconsin.
Retirement Benefits are Generally Considered to be “Marital Property”
Retirement benefits or pension plans of either spouse are considered to be marital property, to the extent that they are earned or contributed to during the marriage. Accordingly, retirement plans and pensions must be included with the rest of the marital property that is to be divided upon divorce. Typically, the benefits are valued and then apportioned between marital and separate property by the court in a Domestic Relations Order (DRO) or a Qualified Domestic Relations Order (QDRO). However, any contributions made prior to the marriage or after divorce are usually considered to be separate property of the contributing spouse.
Retirement Plans Not Included in Marital Property
Some retirement benefits and pensions may not be included with the other marital property that is subject to division upon divorce. Since some retirement plans are controlled by federal law, states are thereby preempted or precluded from applying their marital property laws to those assets. Examples of retirement benefits which are not included as distributable marital property are as follows:
- Social Security payments
- Military injury compensation
- Railroad worker’ retirement benefits
- Workers’ compensation disability awards
Methods for Distribution
Where the retirement benefits are considered to be marital property, a court might use the “deferred distribution” or the “immediate offset” approach to divide the assets upon divorce. Under the deferred distribution approach, the court typically retains its jurisdiction over the divorce and waits to distribute the benefits to the parties when they are actually paid to the pensioner.
In contrast, the immediate offset approach instantly awards an offsetting amount of marital property to the non-employee spouse, equivalent to their share of the plan, and the entire plan itself is awarded to the employee spouse. This is done by calculating the present value of the pension and determining how much was earned during marriage.
Domestic Relations Order/Qualified Domestic Relations Order
In order for one spouse to receive a share of the other spouse’s benefits on divorce, a court must issue a DRO or QDRO to apportion the pension. These orders typically provide specific language as to how retirement benefits are to be distributed between marital or separate property, and thus between the spouses. DROs and QDROs outline how the funds are transferred from the spouse holding the retirement plan, to the spouse to receive a share of the plan, and are included in the Final Judgment finalizing the divorce.
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