Dividing Retirement Benefits in U.S. Divorce Cases

Retirement benefits are treated as marital property in divorce cases throughout the U.S. This article provides an overview of how these benefits are divided in divorce cases.

Defined Contribution Plans

Defined contribution pensions are accounts in which individuals set aside a portion of their income as savings for retirement. Defined contribution plans include:

• 401(k) accounts for private sector employees
• 403(b) accounts for public sector and non-profit employees
• Individual Retirement Accounts (IRA)
• Thrift Savings Plan (TSP) accounts for federal and military employees

In most U.S. jurisdictions, the assets accumulated in a separately-titled defined contribution plan during the marriage are treated as marital property and are subject to equitable distribution, which in many cases means a 50/50 split between the parties. As a simple example, if an account held 50 shares of AT&T stock at the time of marriage and 250 shares of AT&T stock at the time of divorce, 200 shares would be treated as marital property, while the initial 50 shares and any shares accrued after the divorce would be treated as the account owner’s separate property. A 50/50 split of the marital portion would result in the spouse receiving the equivalent of 100 shares.

Defined contribution accounts typically hold a mix of assets that changes over time, which can make the calculation of the marital portion challenging and a potential point of contention. Different states have different rules about when marital property accumulation ends; some states (like Virginia) cut off accumulation upon separation, while others (like the District of Columbia) cut off accumulation at the time of the divorce decree. Maryland usually cuts off marital property accumulation at the time of the divorce decree, but may cut it off earlier if the recipient spouse has stopped contributing to the marriage.

One important consideration when dealing with defined contribution plan assets is their taxability. 401(k), Traditional IRA, and non-Roth TSP assets are tax-deferred, meaning that income tax will be payable on any money withdrawn from the plan unless it is transferred directly to another tax-deferred account such as a 401(k) or traditional IRA. Roth IRA and Roth TSP assets are not tax-deferred, so no tax is payable when they are withdrawn.

Defined Benefit Plans

Defined benefit plans are “traditional” pensions which pay a fixed amount of money to the individual after their retirement. The amount is usually calculated by a formula based upon the length of the individual’s service and their historical compensation.

Defined benefit plans are usually divided based upon the portion of the benefits that were acquired during the marriage. A simple way to calculate this is by dividing the length of the marriage by the length of the accrual of benefits under the plan; thus, if the parties were married for 10 years and a pension accrued for 20 years, the marital property portion would be 50% of the pension amount (10 divided by 20), and only this portion would be divided between the parties (a 50/50 split would therefore result in 25% of the total pension benefits being transferred).

A spouse receiving a pension award in a divorce should consider what happens in the event of their ex-spouse’s death. If they will need the pension benefits for their own support, it is usually a good idea to obtain a life insurance policy for additional security.

Procedures

An ex-spouse can usually collect payments directly from a retirement plan through a court order. This is usually a separate document from the main divorce judgment.

• Corporate defined benefit pension plans in the US, as well as 401(k) and 403(b) defined contribution plans, are governed by a federal law known as the Employee Retirement Income Security Act of 1974 (ERISA). Direct payments from these plans require a special type of court order known as a Qualified Domestic Relations Order (QDRO), which has very specific legal requirements and usually needs to be drafted by a specialist.
• Most employees of the federal government receive pensions from the Federal Employee Retirement System (FERS) or Civil Service Retirement System (CSRS). These pensions are not covered by ERISA, so they require a different type of court order known as a Court Order Acceptable for Processing (COAP). Like a QDRO, this document usually needs to be drafted by a specialist.
• Uniformed members of the U.S. military receive pensions from a different source, the Defense Financial Accounting Service (DFAS), which has its own requirements for court orders. Military pensions are discussed further in our article “Divorce with a U.S. Military Service Member.”
• Some organizations like the State Department, CIA, and World Bank have their own retirement plans with special procedures.
• IRA and TSP accounts do not generally require a separate court order, although a separate order is often prepared.