Retirement Accounts, Pension Plans, and QDROs

When spouses divorce, their marital assets, including retirement accounts and pension plans are subject to equitable division. For questions regarding how retirement accounts and pension plans are divided upon divorce, contact Bergen County property division lawyer, Brian D. Iton. He represents clients in a broad variety of family law matters in Hackensack, Paterson, Newark, Jersey City, and other communities in Bergen, Essex, Hudson, and Passaic Counties.

There are many different accounts through which retirement funds may accumulate: IRAs, 401(k) plans, 403(b) plans, pension plans, are the most common. A married couple may have several of these instruments. The marital portion of these accounts constitutes a marital asset, which is subject to division in divorce. How the accounts end up being divided can take a variety of forms.

Retirement plans are generally divided into two types: defined contribution plans and defined benefit plans. The first category includes, for example, IRAs and 401(k) plans, in which the valuation depends upon how much was contributed by the employee-spouse, plus (or minus) any investment income (loss). Defined benefit plans, however, pay out a specific monthly income at retirement. These are typically pension plans in which the pension benefit is based upon factors such as years of service for a particular company, and the age at which the employee retires.

To the extent that any portion of these retirement accounts and pensions is derived from marital funds or marital efforts, that portion is subject to equitable distribution in divorce. In other words, without any agreement to the contrary, if a spouse contributed to or earned any retirement benefits while married, the other spouse is legally entitled to a portion of those assets.

For example, suppose a man opens a traditional IRA, contributing $2,000 annually. He later marries but divorces after 10 years. Upon divorce, the marital portion of the IRA investment is $20,000 ($2,000 per year times 10 years), so the wife’s share is set at half: the contribution, or $10,000. The husband’s pre-marital share is not subject to equitable distribution, and is not divided. On top of the contribution share, the wife is also entitled to the investment return on the $20,000. Once valued, the contribution share combined with the investment share is typically “rolled over” into the wife’s own IRA or other retirement account. If done correctly, in the appropriate timeframe following divorce this transfer may be made without any adverse tax consequences for either spouse. Alternatively, some spouses elect to “cash out” their marital share of a defined contribution plan. However, if the cash out option is chosen there are hefty tax penalties associated with the withdrawal.

For other types of retirement plans, valuation and division are less straightforward. For example, some pension plans vest over time, and they may not fully vest until an employee has worked for a specified number of years. Issues of valuation before or after vesting are generally handled by third-party experts who are hired by the parties during the divorce. Whether a spouse is partially vested at the time of the divorce, or the couple divorces before the employee-spouse is fully vested are questions that are answered during the “discovery” phase of a case. The information collected during the discovery phase is sent to retirement experts for analysis. Similarly, if a pension value cannot be determined without knowing how long the employee-spouse will work for the company, and at which age that employee retires, discovery and expert analysis is essential to answer these more complicated questions.

Sometimes, in the case of multiple retirement accounts, to avoid future unknowns, and simplify distribution, a couple may agree to use an “offset” method of division. Basically, an offset means that, once a present valuation of a marital asset has been established, one spouse will forego any claim on that asset by offsetting that value for another asset of comparable value. For example, the wife may leave the husband’s pension alone if the husband transfers a comparably valued retirement asset to the wife. All offsets should be analyzed after they have been tax-effected, with a goal of minimizing tax penalties.

Once the determination is made as to how retirement funds and pension plans are valued and will be divided, the next step is usually the drawing up of a Qualified Domestic Relations Order, or QDRO. A QDRO is a court order that specifies and directs each spouse’s retirement plan administrator on how to assign retirement assets held by the administrator in one spouse’s name to the other spouse. Generally, without the QDRO the retirement plan administrator cannot assign one spouse’s retirement assets to his or her former spouse. While the QDRO process sounds complicated most retirement plans have a Model QDRO that must be followed in order to have the plan assign benefits between former spouses.

Finally, it should be noted that the granting of a divorce does not automatically remove one’s former spouse as the beneficiary of a retirement fund or plan in the event of death. If necessary, the ex-spouse must be removed from any beneficiary designation.

Calculating how retirement funds and pension plans should be valued and divided in a divorce, requires an understanding of the different types of plans, and how they should be valued. Misunderstanding the type of plan and its proper method of distribution may have critical financial ramifications. To obtain the advice of an experienced Bergen County property division attorney or representation when significant assets are involved, contact Brian D. Iton toll-free at (844) 431-3380. You can also contact us online to set up a free, no-obligation consultation with an experienced divorce attorney.