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How to Address Retirement Benefits

by | Aug 4, 2021 | Firm News |

Retirement benefits are often a significant part of the marital estate and must be addressed in the settlement agreement or trial of the matter. Retirement benefits come in many different forms, most typically designated as Defined Benefit Plans or Defined Contributions Plans. 

 

A Defined Benefit Plan is what one would typically think of as a pension which provides for a monthly benefit for life. A spouse may typically be a participant of a Defined Benefit Plan through his/her employment with a state or local government or with a private company. Pension benefits that are earned during the marriage constitute marital property and are to be divided equitably. A Qualified Domestic Relations Order (“QDRO”) will be required to properly effect a distribution of the Defined Benefit Plan. Familiarity with the Plan benefits are essential so that the benefits under the plan are all addressed, including but not limited to pre-retirement death benefits and survivor options. Further, while most governmental plans do not allow that non-employee to collect benefits until the employee has retired, many private plans, by use of a separate interest QDRO, will permit the non-employee to collect his/her benefits before the employee retires.

 

Defined Contribution Plans (“DC”) are typically 401k, Profit Sharing, Deferred Savings, 403(b), or other similar tax deferred savings benefits. Included for distribution are also Individual Retirement Accounts. These plans typically have an account balance. Similar to the Defined Benefit Plans, the marital portion of the assets consists of those funds which have been saved during the marriage. “DC” plan savings that exist as of the date of marriage, and savings that are added after an Action for Divorce is commenced constitute the title owner’s separate property. It is important to calculate the investment gains and/or losses on the separate property component as that investment experience, if properly documented, will also be the title owner’s separate property. 

 

Some “DC” plans will require a QDRO to properly divide these accounts as a tax–free transfer. Non-ERISA accounts such as Individual Retirement Account typically do not require a QDRO but all will be contingent upon the entry of a Judgment of Divorce to in order to constitute a tax-free rollover. 

 

In many cases the most significant assets are the retirement accounts and the marital residence, and it is not unusual to offset retirement accounts or to even exchange retirement accounts for non-retirement assets. Defined Benefit Plans can be valued by a qualified actuary to determine a current cash value. “DC” plans typically have an account balance but these are pre tax assets (except in the case of a ROTH IRA) and the account values must be tax impacted if being used to trade-off against a post-tax, cash value asset. 

Retirement benefits are complicated with many different types of plans, differing benefits and options, and other details which must be addressed. It is best to consult with your attorney early on so that all of the plan information is known and can be properly assessed and addressed.