What Is the Difference Between a Pension and Other Retirement Accounts?
There are two types of retirement accounts, defined contribution and defined benefit plans. The most common types of defined contribution plans are 401(k) or 403(b) accounts.
A defined benefit plan is a pension account. The most significant difference between the two plans is that finding the value of a defined contribution account is relatively simple. but valuing a pension plan can be a mathematical mess.
Generally, defined contribution plans are like bank accounts, and the court will divide it based on the amount of money in the account at the time of the division. However, defined benefit plans are much more complex and require the participants to decide whether the non-employee spouse will receive a payout based on either (1) future monthly payments at retirement age, or (2) a payout based on the present value of the benefit.
Is Pension Sharing Automatic in Divorce?
No. When you file for divorce, it’s imperative for you to ask for the property division before the court finalizes your case. It’s common for non-employee spouses to have a relaxed attitude about receiving a pension award; after all, you likely won’t see any value until your spouse reaches retirement age. However, if you wait until retirement age to ask the court for your share of the account, it will be far too late to try and modify your divorce judgment.
How Does the Court Divide Pension Accounts?
Depending on where you live, your court will divide the pension account according to either community property or equitable distribution standards.
Before the court begins property division, the judge will first categorize each asset into either a marital property or separate property category. Separate property is not subject to property division, and generally, the court will award it entirely to the original owner spouse in the divorce. Marital property will be divided between the spouses according to the laws of their state.
In community property states, like California, the court will divide marital property equally—or 50/50—between both spouses.
If you live in an equitable distribution state, the court will divide your marital property fairly between you and your spouse. In this system, fair doesn’t always mean evenly. Most equitable distribution states have guidelines and factors for judges to consider when deciding how to divide marital property.
Am I Entitled to a Portion of My Spouse’s Pension?
It depends. First, you’ll need to provide the court with information on the pension account When was it acquired, who opened it, was it before the marriage, did the couple deposit martial funds into the account during the marriage. If your spouse opened the account after your marriage and contributed only marital income during the marriage, it's very clear that this will be categorized as marital property and you will be entitled to a portion of the pension. It should be divided either evenly or fairly between you and your spouse.
If the account predates your marriage, but you and your spouse contributed marital income to the account during your marriage, the court may categorize it as separate property, but you will have an interest in the martial portion of the account. A court would likely deem the premarital contribution as your spouse's separate property.
If the account predates your marriage, and your spouse never contributed any marital funds to the pension, a court would likely characterize it as your spouse's separate property, and you may not have any interest in it.
Does Age Matter When It Comes to Pension Distribution?
The timing of your divorce won’t usually affect whether you’re entitled to your spouse’s pension. Even if you and your spouse are under the retirement age when you divorce, the court will still divide the pension account.
Pension accounts typically come with a set of rules that an employee must meet before the account is “vested” and until it is, it’s out of reach for the employee and the spouse. Common examples of vesting rules may include requiring the employee to work a specific number of years or reach a certain age before claiming the funds in the account.
Although unvested pensions are marital property, you may want to speak with an experienced attorney to determine whether calculating your portion is worth the effort.
Do I Need to Tell the Pension Plan About the Divorce and Pension Division?
Yes, but it’s not as simple as a phone call. First, your judgment of divorce must state that you will divide your spouse’s pension, and along with the judgment you must prepare a Qualified Domestic Relations Order (QDRO.)
A QDRO is a court order that instructs the pension plan on how to distribute a non-employee’s share of the plan benefits. Your QDRO must match your divorce settlement terms, including the specifics, like what percentage or amount to distribute to the non-employee spouse.
The QDRO isn’t just for the plan, it helps to ensure that any assets transferred from a spouse’s account to a non-employee spouse are tax and penalty free. Whereas if you attempted to transfer funds without it, you’d likely be looking at thousands of dollars in fees.
Some retirement plans require pre-approval of the QDRO before you can submit it for court. Once the court approves it and issues the related order for division of the account, the plan will begin the distribution process.
It’s important to understand that not all attorneys are comfortable drafting complex QDRO documents and most will hire a professional company or QDRO expert to draft the order. Although it costs more upfront, hiring a QDRO expert can save both spouses money by ensuring the order is drafted correctly.
When Will I Receive Funds from My Spouse’s Retirement Account?
The delivery of funds depends on a variety of factors, like the type of account, the status of the employee spouse, and the plan’s payment methods. If your spouse contributed to a 401(k) account, you could complete the QDRO process, and the plan will typically pay you in a lump-sum amount.
However, if you’re receiving a share of your spouse’s pension, the payout will vary depending on the plan. Some pension plans offer non-employee spouses a lump-sum payout after the pension is vested, but that’s not always the case.
More commonly, pension plans pay a monthly benefit (for life) to the non-employee spouse beginning when the spouse reaches retirement age and meets the vesting requirements. If your spouse hasn’t met the pension requirements or age limit for vesting when you divorce, you may need to wait several years for your payout.
Are There Alternatives to Dividing My Spouse’s Pension Plan If I Don’t Want to Wait for My Award?
Yes. Couples that don’t want to go through dividing retirement accounts can create an alternate property division award. One alternative is for the employee spouse to pay the other spouse his or her share of the pension. For example, if a husband’s pension is worth $100,000 and the wife is entitled to $50,000, the husband can use separate funds to pay the wife $50,000, and both can avoid the time and expense of going through the QDRO process and/or waiting for the plan to vest.
Another alternative to dividing a retirement account is to provide the non-employee spouse a larger share of the marital property equal to the amount of the pension share.
Divorce on its own is complicated, but when you add property division and retirement accounts, the task can be daunting. If you have questions, contact an experienced family law attorney near you.