Retirement and Pension
In today’s marriages, retirement benefits can be one of the largest assets owned by a couple. For couples going through a divorce, the division of a pension plan or a retirement plan can have long term effects on both parties’ financial futures. A pension is typically one party’s entitlement to a benefit upon retirement, typically payable in monthly payments post retirement. In determining if the pension is subject to division between the spouses, it must first be determined if the pension is marital property. If the pension was acquired prior to marriage, then it is separate property and not subject to division. It should be noted that the court can take into consideration separate property in determining an equitable division of marital assets but it is only one of several factors to consider.
Pension Acquired During Marriage
If the pension was acquired all or in part during the marriage, then all or part will be considered a marital asset and subject to division. One way to divide a pension is to divide it between the spouses so that each spouse receives a portion of the pension on a monthly basis post retirement. Like all assets, a pension has to be considered in light of the other assets and debts of the marriage to determine how it will be equitably divided. If it was not all marital, then only the portion of that was earned during the marriage may be divided. For instance, if a party retires with 30 years of service but was only married during 15 years of that time, then the pension is 50% marital and the other spouse may be entitled to 25% of the pension payment, one half of the marital portion.
Another way to divide a pension is to determine the present value of the marital portion of the pension and divide the value between the spouses along with the other assets of the marriage.
In order to propose a buyout, the pension is valued based on the future stream of income and a present value is determined. For instance if the pension would pay $1,000 per month for the lifetime of the participating spouse after age 65, then life expectancy tables are employed to determine the anticipated life span and a value is determined. Next, a present day calculation can be determined by applying a reasonable interest rate and determining what would have to be paid today to be equivalent to one-half of the future value. Thus, a present day value offer can be made to the non-participating spouse to waive the interest in the pension plan.
Other considerations are additional assets in the marriage that can be used to set off the present day value of the pension. If the marriage is a long term marriage, then both parties may be counting on the pension income to fund retirement and the non-participating spouse may be unwilling to consider losing that retirement income. However, if a value can be determined and agreed upon, then it is possible to buy out a spouse’s interest in a pension.
Retirement Accounts and QDROs
Although we have been discussing pensions, retirement accounts such as 401k, 403B and other tax deferred savings plans are also subject to division upon divorce. Many companies todays offer retirement savings plans instead of pensions. If the retirement account was acquired in part or in whole during the marriage, then it will be subject to equitable division. If a portion was acquired before marriage, then that amount can be considered separate and not subject to division. There is a method to divide retirement accounts without incurring tax penalties for the division. That method is known as the entry of a Qualified Domestic Relations Order (QDRO). This order allows a pension administrator to segregate a portion of the pension or retirement account for the non-participating spouse and it can be paid out pursuant to the terms of the retirement or pension plan.
Because a retirement account is funded by pre-tax dollars and subject to federal laws, the division of a retirement account requires this special order, usually in addition to a final divorce judgment.
If parties have comparable retirement accounts, then each can keep their own but if one party’s account is more valuable or if only one party has an account, then a division of an account is typically required.
The party that participates in the retirement account is called the participant and the party receiving a portion of the account is called the alternate payee. A QDRO instructs the administrator of the retirement plan to apportion a specific amount or percentage for the benefit of the alternate payee. Many plans have model forms for QDROs upon request but it is important that the form submitted complies with the particular requirements for each plan in order to be properly implemented.
If you are contemplating a divorce, it is important that you consider the value of the retirement accounts for each party and how they should be equitably divided and the impact on the marital estate.
Held Law Firm would be happy to help with your divorce and any questions you may have in regard to retirement/pensions. Give us a call today 865-637-6550.