Retirement Plans/Pension Plans/IRA’s

For many Americans, retirement savings represent one of their most significant assets. The U.S. Department of Labor has estimated that as of 2014, approximately 50 million private wage and salary workers in the United States were covered by employer-provided retirement plans. Accordingly, some of the most important considerations in a separation or divorce proceeding include whether and how to divide party’s retirement benefits.

To the extent retirement benefits were acquired and/or attributable to a spouse’s efforts and labor during the marriage, they must be appropriately disposed of in connection with the division of community property. However, given the future benefit inherent in a spouse’s retirement plans, retirement benefits may also be considered as a source of support and/or as an asset available to effectuate an equal division of community property. By consulting with knowledgeable legal counsel and/or an accountant familiar with the characteristics of their specific retirement plan, a spouse can ensure that the intended division of a plan is realized through appropriate valuation analysis and distribution methods.

In California, retirement benefits are “acquired” when the plan’s economic value is created. In other words, the amount or portion of a spouse’s retirement benefit which should be considered a divisible marital asset is determined by the period of time it was earned by a spouse, not when it was received.

There are two major types of retirement plans: defined benefit plans and defined contribution plans. A defined benefit plan promises a specified monthly payment benefit at retirement, either in the form of an exact dollar amount or through a plan specific formula based on salary and service. Although defined benefit plans are less common in the private sector today, they still exist in public employment areas such as the State Teachers Retirement System (STRS), Public Employees Retirement System (PERS) and in numerous law enforcement positions. On the other hand, defined contribution plans do not promise a specific monthly payment benefit amount at retirement. Instead, the employee spouse and their employer contribute a set sum of money to the employee’s individual account in the plan. Upon retirement, the value of an employee’s account depends on how much is contributed and how well the investments perform. 401(k) Plans, Profit sharing plans, Employee Stock Ownership Plans, Simplified Employee Pension Plans, and Savings Incentive Match Plans for Employees of Small Employers are all examples of defined contribution plans.

In some cases, the right to benefits earned during marriage may be assigned in part to the nonemployee spouse as part of an “in-kind” division. On the other hand, community property interest might be disposed of through a “cash-out” division, which assigns the benefits entirely to the employee spouse. However, there is no “best” way to divide retirement benefits. What will be “best” in a specific case will depend on a variety of factors such as the type of retirement plan, the nature of the participant’s retirement benefits, and why the parties are seeking to divide those benefits. For example, tax consequences and/or determining whether benefits are being divided to provide support or simply to affect an equal division of community property may impact which division would be favorable to the receiving party.

While the division of marital property generally is governed by California law, in many circumstances, the assignment of a retirement interest must comply with Federal law, namely the Internal Revenue Code of 1986 (the Code) and the Employee Retirement Income Security Act of 1974 (ERISA). ERISA is a Federal law that regulates the operation of most voluntarily established, private-sector retirement plans and sets standards of protection for individuals participating therein. ERISA and the Code do not permit a participant to assign or alienate the participant’s interest in a qualified retirement plan to another person. Under ERISA and the Code, retirement interests are assignable only if the judgment or court order creating or recognizing a spouse or former spouse’s interest in an individual’s retirement benefits constitutes a Qualified Domestic Relations Order (“QDRO”). While most employer-based pension plans and 401(k) plans constitute “qualified plans” under ERISA, IRA-based retirement plans are not, and therefore may be assigned to a party in a dissolution action without execution and entry of a QDRO.

Prior to dividing a retirement plan under a Judgment or other Domestic Relations Order, parties should consult legal counsel to determine whether a QDRO is necessary in order to avoid tax consequences or penalties and/or whether a Domestic Relations Order meets the QDRO requirements under ERISA. In some cases, in determining the value and/or division of a community property retirement plan, forensic accountants or other legal counsel with an expertise in ERISA and tax law may be retained and/or consulted.

Contact Phillips Whisnant Gazin Gorczyca & Curtin, LLP today to find out how our family lawyers can help with the division of retirement plans, pensions, and IRAs in your divorce or separation.

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