How Are Retirement Benefits Divided?
401k’s, 403b’s, IRA’s, Thrift/Savings Plans
There are two types of retirement benefits: Defined Benefit Plans and Defined Contribution Plans.
Defined Benefit Plans
Defined Benefit Plans are the traditional type of pensions where you get a set amount of money each month for life when you retire. They are no longer commonly used in the private sector, and are continuously being replaced by 401K’s. However, they remain the norm with federal, state, and local governments, schools, police, firefighters, and unions.
The retirement benefits that are accrued during the marriage are marital assets, and are subject to division between the spouses at the time of divorce. With defined benefit pensions, it seems that the courts universally divide the marital portion on a 50%-50% basis between the spouses.
The marital portion is that which is accrued during the years of the marriage where the employee-spouse was in the retirement Plan.
As an example, if the spouses are married 25 years at the time of divorce, and the employee-spouse was in the Plan for only 10 of those years, then the non-employee spouse would be entitled to ½ of 10/25th’s of the monthly benefit payment.
The above would be true if the employee-spouse left the Plan or retired at the 25 year mark. If he or she remains working and in the Plan until the 30 year mark, then the non-employee spouse would receive ½ of 10/30th’s of the monthly benefit.
The non-employee spouse receives his or her share of the monthly benefit directly from the Plan Trustee via a separate court Order – a Qualified Domestic Relations Order (QDRO) – which is entered simultaneously with or after the Judgment for Dissolution (mostly after). QDRO’s are authorized under federal law and are entered in the divorce court.
An example of this would be: If an employee has already worked for a company for five years at the time of the marriage, and gets divorced and leaves the plan at the 15 year mark, the non-employee spouse would be entitled to 50% of 10/15ths of the monthly benefit. If the employee spouse stays employed, and retires after 30 years of service, the non-employee spouse would receive 50% of 10/30ths of the monthly benefit.
Another way of dividing the marital portion of a defined benefit pension is to have an actuary provide a present value of the marital portion in dollars and cents, and then the parties may decide to trade the after-tax value of his or her percentage for a similar after-tax value of another of the parties’ marital assets that might otherwise be awarded to the other party.
Defined Contribution Plans
Defined Contribution Plans are tax deferred savings Plans. The most common are 401k’s, 403b’s, IRA’s, SEP IRA’s, Roth IRA’s, and Thrift/Savings Plans. Unlike defined benefit pensions, these are like banks or stock accounts, where you get a regular statement from the Plan, which shows the exact dollar balance of the value of the account for the period in question.
The amounts accrued in these accounts during a marriage are a marital asset, which is subject to division between the spouses at the time of divorce. QDRO’s are also used to divide these account balances (except for IRA’s, which are not qualified Plans under the federal umbrella).
When the owner of the account transfers the other spouse’s percentage to that spouse, there are no penalties or income tax implications to the owner-spouse, provided a proper QDRO is used; or, in the case of IRA’s, if the funds are promptly deposited in the non-owner’s similar IRA or Roth IRA account.
The marital portion of these accounts are not divided 50-50 as commonly as in the case of defined benefit pensions. They may be divided 60-40, 65-35, 70-30 or in any other percentage that the parties agree upon, or that the court finds to be equitable.
As with defined benefit pensions, the parties often opt to work out a trade where one spouse will take a larger or smaller after tax percentage of the account balance in exchange for a similar after tax interest in another of the parties’ assets, which the other spouse would otherwise have received.
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Richard and Kari are staunch advocates of the non-court approach to divorce, and are also active and seasoned litigators with over 70 years of combined trial experience in the Illinois divorce courts of Cook, DuPage, and Will counties.