Dividing Pension Plans Through Dissolution of Marriage Proceedings

A pension can take different forms and is basically defined as a fund into which money is deposited during an employee’s employment years and from which retirement benefits are provided to the employee after retirement. See-pension Division of retirement plan benefits is always a major concern of both parties upon dissolution of marriage and is a complicated matter which often requires a Qualified Domestic Relations Order expert (QDRO). Depending upon the type of pension plan it may also be necessary to join the pension plan administrator to the dissolution proceedings to ensure that your Qualified Domestic Relations Order is acceptable to the plan administrator. See –Property and debts in a divorce

Whether or not you are required to join the pension plan administrator there are requirements which will be imposed by the court for entering the Qualified Domestic Relations Order. Even in the case where the pension plan administrator is not required to be joined as a party to the dissolution of marriage proceeding it is advisable to utilize the services of an expert for preparation of the Qualified Domestic Relations Order prior to submitting to the Judge for approval.

The division of the pension plan benefits will be based upon the manner in which the pension benefits were acquired including a determination of what percentage of the pension benefits were earned by the employee during the marriage and what percentage of the pension benefits was acquired prior to the marriage and/or after separation. Much like the division of other tangible personal property during the marriage the division of pension plan benefits will be based on the determination of the portion of the benefits are community, quasi community or separate property. Determining the value of the pension at the date of divorce will likely depend upon whether the pension plan is a defined benefit pension plan or a defined contribution plan.

The determination of the cash value of a defined benefit pension plan is typically less complicated because the cash value of the pension benefit can be determined by a set formula based upon your salary history, length of employment and does not depend upon independent investment risk factors. See- What Is a Defined-Benefit Plan? Examples and How Payments Work  By contrast a defined contribution pension benefit plan’s value at the date of divorce and/or separation is dependent upon investment risk factors and may not be easily determinable without the assistance of financial experts. See- Defined contribution plan  Examples of typical defined contribution plans are Individual Retirement Accounts (IRA’s), 401(k) plans and the Federal Thrift Savings Plan.

See-Plan for a lifetime with the TSP Although there are investment risks associated with the defined contribution plans there are benefits to these types of plans which are beyond the scope of this blog. Division of a defined contribution plan can also create risks of investment loss/gain after the divorce and the non-employee spouse may prefer a cash buyout to eliminate further risks and/or the need to make further investment decisions associated with the administration of the pension plan in the future.

Additionally, while there are tax savings which make a defined contribution plan an attractive option there are limits on the deferral amount set by the Internal Revenue Service. See- Retirement Topics