Tag Archive for: retirement

Divorce and Your Retirement

As a family lawyer for Bucks and Montgomery County, we help clients just like you through the complicated process of divorce. When clients walk in our door, they are usually very concerned about paying and receiving alimony and child support and then working out a schedule for their children.  During the initial meetings and discussions, we remind them of the importance of looking down the road a few years to retirement.

 

Divorce is as much about your future as it is about your past and present. And retirement funds and benefits are a critical component of your financial future. Whether you are trying to protect your retirement accounts, or collect from your spouse’s retirement accounts, dealing with these funds is as important as it is complex.

 

For many people, retirement accounts and benefits are one of their most valuable assets. In a divorce, these funds are considered marital property and are subject to division. Retirement funds can include 401k money, investment funds, IRAs, and pensions.  Social Security is a benefit and not an asset that is distributed in a divorce but may be considered income for purposes of support. With short and long-term implications for both parties, it is essential to understand the laws and your rights when it comes to divorce and retirement funds. Here are a few points to keep in mind.

 

Understand how retirement funds are divided

An ex-spouse is entitled to a percentage of the amount of retirement earned during the marriage.  If a spouse has been working for 20 years, and the marriage lasted for the last 12 of those years, the ex-spouse is only entitled to retirement funds deposited and interest earned during those 12 years, not earnings or investment made prior to the marriage or after separation.  Also, since oftentimes the spouse is still working, it is unknown how many years of work they will have. A fraction, known as a coverture fraction, is a formula often used to determine what the percentage will be at retirement. The numerator is the number of years married and the denominator is the total number of years accumulated in the plan (usually TBD).  The percentage the court awards is multiplied by the fraction and the amount of the plan or the dollar benefit to determine what the spouse, called the “Alternate Payee” will receive. It is also important to determine if there are any beneficiary options and whether the spouse will be a beneficiary and whether it has marital value.

 

How are your retirement funds divided after divorce?  

If your or your spouse’s 401(k) or employer-sponsored retirement accounts will be divided, you need to let the plan administrator know as soon as possible. They will be able to tell you the value of the retirement account on the date of marriage and the value upon divorce – again, this is the part of the retirement account subject to division.  

 

If you are going to be dividing retirement assets, in many cases, you will need to obtain a Qualified Domestic Relations Order (QDRO), which is separate from your divorce decree. It will be signed by a judge and will instruct the employer to separate the retirement account into two accounts. This order will allow retirement funds to be withdrawn from the retirement account without penalty and deposited into a separate account for the non-employee. It is important to note that QDROs are not needed when the retirement plan is an IRA and in other types of plans will be a DRO similar to a QDRO.  It is best to hire an expert to draft a QDRO who is familiar with the rules and regulations and plans involved. The cost to draft it is typically around $600 per QDRO and the parties normally share that cost. You may want to check if your plan, however, imposes any of their own fees.

 

Consider Alternatives

In some situations, the parties may negotiate a settlement that avoids the splitting of retirement funds. For example, one spouse may offer the other a buy-out such as stocks, bonds, investments, or property of equitable value in exchange for keeping all of their retirement funds intact. In order to do this, however, you must know the dollar value of the marital portion of the retirement plan. In pensions, this will require an appraisal.  In 401(k) plans you will need all the statements after separation as well the statement at the time of separation in order to determine what is marital.

 

Get Professional Help

A qualified attorney will know your rights in regard to protecting or collecting retirement benefits and funds. A certified accountant can help you explore the short-term tax implications and long-term financial ramifications of dividing retirement funds.

 

Divorce presents an incredible challenge – making decisions that have far-reaching impacts at a time when you are the most emotionally and mentally stressed. Allowing a compassionate professional to provide guidance can help ensure not only a brighter future but a more financially secure one as well.

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Treatment of Pensions in Divorce

Pensions are subject to division in a divorce to the extent one of the parties earned the pension benefit during the marriage. The court will equitably divide the marital portion of a pension plan after considering all the relevant factors in equitable distribution. The marital portion of a plan would be the portion that accrued from the date of marriage through the date of separation. An entire pension will be marital if the parties were married the entire time a party earned benefits under the pension. In other cases, a coverture fraction is applied based on the total years of service compared to the number of years of marriage. Pensions are often a deferred distribution asset meaning that each party will receive their share at retirement age of the participant. There is the option to do an immediate offset of the marital portion of the pension if there are other assets of comparable value.

In a deferred distribution scenario, post-separation increases in the pension plan might also be allocated between the parties. An example would include post-separation cost of living increases. Since this increase in the benefit is not due to the effort or contribution of a party the courts feel it should be shared. Increases in the benefit due to the effort or contribution of the party or their employer post-separation will be non-marital. This treatment of post-separation increases has been addressed in several cases including MacDougall v. MacDougall, 2012 PA Super 83 and

Berrington v. Berrington, 534 Pa. 393 (1993).

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Social Security Retirement

Social security retirement benefits are payable based on the individual’s earnings history as well as age of retirement. Full retirement age is presently 66 years old. The benefit is reduced if electing to receive the benefit earlier. The minimum age to start collecting is presently 62 years old. An individual can elect to receive benefits under the spouse’s earnings history instead. An individual may receive up to 50% of their spouse’s benefit. This does not impact the spouse’s benefit in any way. An individual may elect to receive under their spouse’s benefit if their earnings history was substantially higher.

Even after divorce it may be possible to collect under your prior spouse’s earnings history. There are a few conditions that must be met. First, you must have been married for a minimum of ten (10) years. Second, you must not have remarried. Third, you must be at least 62 years old. Finally, the amount you will receive under your ex-spouse’s earnings history must be more than what you would receive based on your own work history. Electing to receive under your ex-spouse’s history will not affect any new spouse. Retirement benefits may also be payable to your children until they are 18 or graduate high school, whichever is later.

Click here to read more about divorce after 50.

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Pensions and Retirement in Divorce

Pensions, as well as other retirement plans, are often one of the assets up for division in a divorce. The court will equitably divide the marital portion of a pension plan after considering all the relevant factors in equitable distribution. The marital portion of a plan would be the portion that accrued from the date of marriage through the date of separation. In some cases, the entire pension will be marital depending on the timing of the marriage alongside the start date of the pension plan. The marital portion will also include investment experience on the marital portion that accrues post-separation. It will not include contributions by the employee made post-separation.

A court order is necessary to effectuate a distribution of a pension, or other qualified plan, in a divorce matter. Often called a qualified domestic relations order, or QDRO, the court order provides requisite information to the plan administrator regarding the split of the pension. Qualified plans are governed by the Employee Retirement Income Security Act (ERISA) and the QDROs allow an exception to ERISA’s anti-alienation provisions. QDROs may also be utilized outside of pension plans to allow for a tax-free rollover of benefits. A popular example would be a 401k or other profit-sharing plan. It is important to check with the plan administrator to confirm if a special court order is necessary in the context of a non-qualified plan. In some instances, a property settlement agreement or transcript describing the transfer along with a divorce decree is enough.

Click here to read more about equitable distribution.

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