Dividing Retirement Accounts in Divorce
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Most states treat retirement accounts as marital assets that must be divided between spouses when they divorce. In order to arrive at a fair division of the retirement benefits, it is important to understand how the accounts are valued and divided. In general, the rules that govern the division of retirement plans can be very complicated and depend on the type of benefit being divided. In addition, once the division is made, it may be difficult to change it in the future.
There are generally two types of retirement accounts, defined contribution plans and defined benefit plans. Defined contribution plans, also referred to as savings plans, are retirement accounts where the employee, the employer, or both, make contributions into the employee’s retirement account. The most common savings plan is the 401(k). Defined benefit plans are company retirement plans, such as pension plans. These plans, which are based on the employee’s salary history and years of service, begin paying monthly benefits when the employee retires and payments continue for the rest of the employee’s life.
Methods of Dividing a Retirement Account
The first step in dividing a retirement account is to determine the present value of the benefits. If the retirement account is a defined contribution plan, the present value is usually the amount of money in the account as of a certain date. If the retirement account is a defined benefit plan, it is more difficult to determine the present value so it is advisable to retain the services of an expert to make the necessary calculations. Once a present value is determined, there are two methods of dividing the retirement account: The Immediate Offset Method and The Deferred Distribution Method.
Under the Immediate Offset Method, the present value of the retirement benefit is compared to the value of other marital property. The spouse who earned the retirement account retains the rights to it and the other spouse is given another marital asset of equal value in return for waiving his or her interest in the account. However, this method is only available if the value of the retirement account can be determined.
Under the Deferred Distribution Method, the benefits are not divided until such time as they are payable under the plan, at some future date. The division of benefits is set forth in a court order called a Qualified Domestic Relations Order (QDRO). The QDRO sets forth how much each spouse will receive in the future when the benefits become payable. The QDRO is a separate order signed by the judge in addition to the divorce decree.
Factors to Consider
The court will take several factors into consideration when determining a fair division of a retirement account, such as the length of the marriage. For long-term marriages, retirement plans are usually split 50-50. However, only that portion of the retirement account that was earned during the marriage is subject to division. If a spouse earned part of the retirement benefit before marriage, that portion of the benefit would be considered separate property and would not be included in the division. Similarly, if part of the benefit was earned during the marriage and part after the spouses separated, the part of the benefit earned while the marriage was intact will be divided and the part earned after separation will belong to the spouse who earned it.
To make sure the benefits are paid correctly, a certified copy of the decree or QDRO should be filed with the employer or financial institution responsible for making payments under the plan. The employer or financial institution will separate the retirement account into two separate accounts. Once the benefits become payable under the applicable law or pursuant to the terms of the plan, the employer or financial institution will make the appropriate payments.