Pensions, Retirement Plans and Divorces — Oh My!
Whether belonging to a member of the growing group of baby boomers filing for divorce or to someone who is part of a younger generation, retirement accounts and pensions are often a major consideration when determining how to split marital property.
Retirement accounts are often a major portion of the total assets accumulated throughout a marriage. Common retirement vehicles include pensions and 401(k) plans. A 401(k) plan is a tax-friendly account built through employee contributions made from each paycheck and sometimes matched in part by the employer, while a pension is employer funded and pays monthly benefits to a retiree in an amount based on the years he or she worked with a company and the salary earned.
Most people rely on their retirement assets to provide financial security during their golden years. Because of the importance they can play in funding basic needs in retirement, retirement assets can be major points of contention in a divorce negotiation when the parties decide how these assets will be split in the divorce.
If the parties cannot come to a negotiated agreement about how these assets will be split, that decision will be left to the judge.
Basics of Splitting Retirement Assets
Entering these conversations with the following in mind can help streamline the process:
- Usually retirement accounts accumulated during the marriage are considered marital property to be split in divorce even if only one of the spouses earned them.
- A "qualified domestic relations order" may be needed to split some retirement plans, usually pensions.
A QDRO is a court order that provides instructions to the retirement-account administrator on how to pay benefits to the nonemployee spouse after a divorce. The order is important because it allows the separation and withdrawal of retirement funds without steep tax penalties.
State Family Law and Pensions
Pensions are often more difficult to split than other plans, like the 401(k). In addition to these general rules on splitting retirement funds, specific state laws may apply to the division of pensions. In Connecticut, three methods are often used to determine both the value and distribution of pension benefits: present value, present division and reserved jurisdiction. The court may also use a different method if it finds it to be more appropriate than any of these three for particular circumstances.
The parties to a divorce can negotiate which division method to apply to their pensions, or if they cannot agree, the judge will have to choose which approach to take.
Under the present value method, the pension funds are valued at the time of the divorce. The employee spouse's life expectancy, account interest rate and projected retirement date are all taken into consideration to come up with this value. The nonemployee spouse is then granted other marital property to offset the amount of pension benefit to which he or she would have otherwise been entitled. This method provides a clean break, since the valuation and offset can be made prior to finalization of the divorce.
The present division method delays distribution until the pension matures. Instead, the parties negotiate or the judge decides at the divorce trial the percent of the payout each spouse will eventually get. That percentage is then applied closer to the date of retirement. A QDRO is needed for this method.
The final method, reserved jurisdiction, can only be used in Connecticut courts for vested pensions, not unvested. This approach not only delays division until the pension has matured, but also delays the percentage determination. Jurisdiction to make these later determinations stays with the trial court until the benefits are to be paid out, typically at retirement. At that time, the ex-spouses return to court to for these determinations to be made and to obtain a QDRO that will instruct the pension administrator how to pay out the pension benefits.
Although these are the main methods applied in Connecticut, each situation is unique. It is wise to contact an experienced marital property division attorney to discuss your situation and better protect your legal rights.