Ending a marriage is difficult. There is an emotional toll on top of the complexity of deciding who will keep certain items that have accumulated over the years. Calculating and dividing retirement assets adds to that complexity. For many, it can be the most significant part of their entire nest egg, especially when fully funded for years. That’s why it is critical to understand 401(k) and IRA accounts as marital property and what dividing them may mean.
Asset Division in the Court System
When it comes to valuable items titled in the names of both spouses, such as retirement accounts or property held by both parties as tenants by entireties––a form of ownership that only married individuals can hold––courts in Maryland do not have the authority to transfer assets from one person to the other. So, what happens if most of the assets are titled only in the name of one spouse? Suppose the assets are marital property, meaning they were acquired and paid for during marriage. In that case, the court may grant the spouse who does not own the assets a monetary award to balance any unfairness. In some states, like Maryland, this process is called equitable distribution. Community property states usually divide items equally. However, a monetary award does not have to equal the item’s value. The outcome only has to be fair and equitable.
Retirement funds are also subject to equal distribution by the court during a divorce. There are three options when splitting them up in a comparable manner:
1) Based on the evidence, the court may determine the amount of a party’s contributions to the retirement assets and award the other party a percentage of the account.
2) A court may determine the present value, usually through expert testimony and only if a party chooses explicitly to present evidence of current value and include the present value of the retirement asset, along with the value of other marital assets, in connection with making a monetary award to a party.
3) Alternatively, a court may determine a percentage of any future payments from a pension plan someone should receive if, as, or when the other party begins receiving payments. This last option is usually via an order from the court to the pension plan company.
Retirement funds, depending on their origination, are categorized in different ways:
- For private non-governmental plans, the order is called a Qualified Domestic Relations Order (QDRO).
- In a governmental plan administered by the Office of Personnel Management (OPM), the order is usually referred to as a Court Order Acceptable for Processing (COAP).
- In the case of a defined contribution asset, a court may transfer interest from one party to the other using a QDRO or similar order.
Types of Retirement Funds
Retirement assets may be grouped as a defined contribution or a benefit asset. For a defined contribution asset, the person or employer contributes funds. Most of these accounts issue monthly or periodic statements, making it easy to determine the total value. Examples of defined contribution assets include IRA, SEP IRA, Roth IRA, 401(k), 403(b), Thrift Savings Plan, and profit-sharing plans.
For a benefit asset, employers offer some type of pension plan that employees gain interest in after working for the employer after a certain period: this is known as vesting. Some of the most commonly defined benefit assets or pensions are:
- Military pensions
- Federal government pensions under the Federal Employees Retirement System (FERS)
- Federal government pensions under the older Civil Service Retirement System (CSRS)
- Teacher pensions or other local or state government plans
With defined benefit assets, employees usually work a certain number of years before being eligible to receive the plan’s benefits. Upon retirement, a monthly payment for the remainder of the employee’s life is dispersed. Payments stop at the time of the employee’s death. An option also exists for an employee to receive lower payments during their life in exchange for benefits paid to a designated survivor, which could be a former spouse, if mandated by the court.
Retirement assets are a form of deferred employer compensation benefits. One example is stock options, which are also subject to fair division during a divorce.
Asset Division Complexities
It frequently happens that a retirement account is opened before marriage or sometimes after a divorce. When that occurs, it is not marital property and is not subject to equitable distribution. Someone who contends that all or part of a retirement asset is non-marital must show proof that this is the case.
In defined contribution assets, one must be able to trace that a stock that exists during divorce existed immediately before the marriage. Tracing the stock’s history becomes difficult if additional shares were traded, bought, or sold while the couple was still together.
For defined benefit assets that are part marital and non-marital, the court uses something called a coverture fraction or the Bangs formula to divide the marital portion of the defined benefit asset. For example, let’s assume the following:
1) The parties are married for ten years while one party was acquiring pension benefits from their employer.
2) The employee’s spouse who acquired pension benefits was employed for 20 years.
3) At the time of retirement, the employee’s spouse will receive a $1,000 monthly pension payment.
Assuming that the court would grant the non-employee spouse half of the marital interest in the pension, the non-employee spouse would receive $250 per month from the pension ($1,000 x 10/20 x 1/2 = $250.)
A QDRO usually has no immediate tax consequences if a defined contribution asset is transferred from one spouse to another. For instance, a transfer through a QDRO from one spouse’s 401(k) to the former spouse’s IRA is not taxable. However, if the transfer is made directly to the other spouse and not to their IRA, there may be an immediate tax obligation. This is why it’s critical to check with your accountant if you have any tax questions before making logistical decisions.
Astute Legal Representation Makes All the Difference
Understanding how a court may distribute retirement assets is highly complicated for someone to do on their own unless they have the necessary experience and training. That’s why hiring an experienced attorney to represent you is critical. Meiselman Helfant & Wills know how to navigate complicated legal issues to resolution effectively. Call today and let us know how we can serve your legal needs.