How Are Retirement Plans Divided in a Divorce?
It’s not unusual—you’ve been married for decades, raised your children to be adults, and then the marriage falls apart. You may both have worked and contributed to retirement plans, or there may have been a stay-at-home parent who now faces retirement. How will the court typically divide accumulated retirement assets?
The first and most important thing to understand is that the court will only concern itself with retirement assets that were accumulated or acquired during the time the parties were married. Any retirement accounts that were brought into the marriage will be considered separate property. At a minimum, contributions made before marriage will not be subject to division in a divorce, nor will contributions made after legal separation.
Determine the Type of Plan
How retirement assets will be divided will depend in part on whether the plan was a defined contribution plan or a defined benefit plan. With a defined contribution plan, such as an IRA, 401(k) or profit-sharing plan, the participant controls how much is put into the plan, but the amount of the payout depends on the performance of the investments into which the money was placed. With a defined benefit plan, the participant typically receives a fixed benefit based on a formula, which usually factors in earnings and years of service. Employers typically fund defined benefit plans, whereas defined contribution plans are often funded by the employee, with some level of matching funds contributed by the employer.
Identify When the Plan Was Initiated
If the plan was started before you were married, there will likely be a component that is separate property (the value before your marriage) and a component that is “co-mingled”—the increase in value, both from growth and new contributions, during your marriage. Any growth or contributions after the legal date of separation will also be considered separate property.
What is the Value of the Plan?
It’s customarily advisable to have an expert do a valuation of the plan, particularly when you don’t anticipate using it for some period of time. Typically, a defined benefit plan will be easier to value than a defined contribution plan.
How Will Assets Be Divided?
Once the value is determined, the court will attempt to ensure that both parties receive an equitable distribution of the retirement plan value. The courts prefer, if possible, to use an offset to accomplish a fair distribution, giving one party other assets to offset their interest in the retirement plan. For example, a non-working spouse may receive the house and some other property to offset allowing the working spouse to retain all retirement benefits.
If the court cannot find a way to offset the value in the retirement plan, it will typically enter an order that is binding on the company administering the retirement plan, indicating how the retirement assets will be divided. This order is known as a Qualified Domestic Relations Order, or QDRO.