Division of Pension & Retirement Accounts

Although pensions are by law only in the name of one spouse, recall that marital property is defined by when it was acquired, not whose name it is in.

Retirement benefits acquired during marriage are marital assets, to be divided along with the rest of the marital estate. They may be slightly more complicated than dividing traditional assets, however, due to tax considerations (was the account funded with pre-tax or post-tax money), vesting of employer matching contributions, and they may require special orders to divide them.

A pension can come from a variety of different types of employer - private company, state or local government, federal government, the military, a union, or individual savings in an IRA. But no matter the source, all pensions are one of two types.

Government Pensions

When a spouse works for the government (federal, state, county or city), he/she will typically have a government-sponsored pension plan, often with special statutory requirements and unique vesting rules. For more information on dividing such pensions in a divorce, see the Division of Government Pensions article. 

Defined Benefit Retirement Plan

A defined benefit plan is the “traditional” pension plans which most employers offering retirement used decades ago, but they have fallen into disuse in the private sector, and are primarily used for government pensions. With a defined benefit plan, the employer will pay the employee a monthly stipend, usually based upon the number of years of employment, the employee’s salary at the time of retirement, and the employee’s age at retirement.

It is rare for an employee’s term of employment to coincide exactly with the marriage - more commonly, a person will have premarital employment which contributed towards the pension, or after divorce, continues to accrue pension benefits.

For all defined benefit retirement plans other than a military retirement when the decree was issued after December 23, 2016, the formula for division is known as the “coverture”, or “time-rule” formula. The marital share, typically calculated by months, is:

Duration of Marriage Overlapping Employment
----------------------------------------------------------
Total Duration of Employment

Example #1: All marital. The operative dates are:

1970 Marriage
1972 Commenced Employment
2018 Retired
2019 Divorce

The employee worked for 46 years (1972 - 2018), but as it was all during the marriage, the marital share would be 46 / 46, or 100%. And the spouse would receive half of that, or 50%.

Example #2: Part Marital & Part Separate. The operative dates are:

1970 Commenced Employment
1975 Marriage
2015 Retirement
2018 Divorce

The employee was married for 43 years (from 1975 to 2018), but three of those years (2015-2018) was after retirement. That means that the numerator would be the 40 years of overlap from the date of marriage in 1975 through retirement in 2015.

The denominator would be the total duration of employment at the time of retirement, or 45 years (1970 through 2015).

Thus, the marital share would be 40 / 45, or 88.89%, and the spouse’s share would be half of that, or 44.45%.

Defined Contribution Retirement Account

A defined contribution pension is a savings account which a person invests in, such as an IRA or a 401(k), which then grows (hopefully!) as the stock market grows. Upon reaching retirement age, the person is allowed, or even required, to start withdrawing funds annually from the account.

If the plan is employer-sponsored (e.g. a 401(k)), it will often have an employer matching contribution.

Dividing a defined benefit plan is mathematically the same as dividing a bank account or mutual fund - the value as of dissolution is known, and therefore is the starting point for division. If the spouse started contributions during the marriage, then at dissolution the entire account is marital and subject to division as part of the marital estate.

How about a spouse who contributed into an IRA before marriage, and then during marriage continued contributing? The increase in value during marriage is marital property, regardless of the increase (spouse contributions, employer match, market forces, etc).

To figure out the marital share, you need at a bare minimum the statements from the date of marriage and present to show the difference in value. Often, with counsel on a case who are trying to problem-solve, this is all the evidence needed. However, as it is possible that someone withdrew funds or took out loans during the marriage, strictly speaking a spouse may be required to produce statements from the date of marriage onwards.

Example. At the time of marriage, Pat’s 401(k) was worth $50,000, and at dissolution, it was worth $200,000. The original $50,000 principal which Pat came into the marriage with remains Pat’s, and the $150,000 increase is marital, with each spouse receiving $75,000. Thus, Pat receives $125,000 (the original $50,000, plus $75,000 half of the increase).

If the retirement account lost value during the marriage, then there is no marital share to divide.

Qualified Domestic Relations Order (QDRO)

If a pension is governed by ERISA, it is called a “qualified” pension. While a separation agreement or court will provide that a qualified pension will be divided, the formal division itself requires a separate order known as Qualified Domestic Relations Order, or QDRO. Such orders to divide 401(k)s and defined benefits plans must comply both with federal law, as well as with the requirements of the pension plan itself.

By contrast, government pensions (FERS, PERA, military retirement) require a specialized order to comply with the laws establishing the pension.

While attorneys or spouses should ensure that all required orders, including QDROs, are timely completed, there is no official time limit on a QDRO. However, too long of a delay risks the employee spouse retiring and collecting benefits before they are divided, or worse, dying.

Should the employee die before the QDRO was approved, the former spouse can still collect, though it's more laborious. In an unusual case, husband had failed to disclose a pension in a divorce, and upon his death, his former wife learned of it. She obtained from the trial court a QDRO dividing the pension, and awarding her survivor benefits, nunc pro tunc to a date prior to her ex-husband's death (that means "now for then" in Latin, but basically it means the court backdated the order), which is a requirement of ERISA. Patton v. Denver Post Corp., 179 F.Supp.2d 1232 (D.Colo. 2002).

The pension plan administrator refused to accept the order since it was entered after the employee's death, and the former spouse sued. The federal district court framed the issue as: "the question before me is whether ERISA precludes, or renders invalid as Defendants seem to suggest, a state domestic relations court's attempt, pursuant to its continuing jurisdiction in a domestic relations case, to correct an omission of pension benefits in a previously entered divorce decree after the plan participant dies." Id at 1236.

The court noted that "Nunc pro tunc orders may be entered by a Colorado court to correct an error or omission in court records and are deemed to have retroactive effect." Id. at 1237, and Colorado law even allows a court to enter a nunc pro tunc order after one party has died. In re: Marriage of Rose, 574 P.2d 112, 113 (Colo.App. 1977). Since there is nothing in the ERISA statute which preempts state law on nunc pro tunc orders, the court upheld its validity and ordered survivor benefits for the former spouse.

Individual Retirement Accounts (IRAs)

One of the most common methods of saving for retirements, an IRA is a defined contribution plan, by which an individual will contribute annually into an account held at a private brokerage. The maximum annual contribution is currently $6000 for 2019.

The IRS also allows a working spouse to contribute towards a non-working spouse’s IRA, appropriately known as a Spousal IRA, which has the same contribution limits.

Note that the Coverdell Education Savings Account is also referred to as an Educational IRA. Despite use of that term, this is a college savings account which is typically set aside for the benefit of the children, and not an IRA subject to division upon dissolution.

An IRA may be funded with pre-tax dollars (a traditional IRA), for which the individual whose income does not exceed the income thresholds (in 2019, it is $137,000 for individuals and $203,000 for a married couple). These accounts grow tax-deferred, which means that upon withdrawing the money, taxes are owed on all funds other than post-tax dollars contributed by someone whose income was above the threshold.

An IRA may also be funded with post-tax dollars (a Roth IRA), which is not tax-deductible. These accounts grow tax-free, and when the money is withdrawn at retirement, it is entirely tax-free.

Regardless of whether the account is a Roth IRA or a Traditional IRA, the method of division is the same. To allocate a portion of an IRA to the spouse who is not named on the account, the order should specify either the dollar amount owing to that spouse, or the percentage of the IRA owing to that spouse.

Using a fixed dollar amount will give that spouse the amount specified at the time of division, despite any changes to the value of the IRA. If a percentage is used (e.g. 50%), then the spouse is awarded half the value as of the date of the decree, plus/minus any changes in value to that half.

Example:  At dissolution, the IRA is worth $10,000, and each spouse is awarded 50%.  The lawyer forgets to advise the clients how to divide the retirement (neither client used Graham.Law), so several months later when the IRA is finally divided, it has appreciated in value to $15,000.  Each spouse now gets $7500, rather than $5000. Of course, the same is true in reverse, should the IRA decrease in value.

Typically, fund management companies will require a copy of the court order allocating some or all of an IRA to the other spouse, along with their own form, usually signed with a medallion signature guarantee (not simply a notary - think of it as a "super notary"), which formally transfers the IRA.

As with other assets divided at dissolution, division of an IRA is not a taxable event - each spouse simply ends up with their own portions of the account. But if one spouse then chooses to withdraw funds, that spouse would then owe taxes on the amount withdrawn (if a traditional IRA), as well as potential tax penalties if the spouse did not reach the retirement age.

401(k)

401(k) plans are the most common retirement plans offered by private employers, having surpassed the traditional defined benefit plans long ago. Just like with an IRA, a court can divide a 401(k) between the spouses, again without regard for which spouse was the employee and which was not. And it is also not a taxable event, nor one for which an early withdrawal penalty applies.

Often the employer will match the employee’s contributions up to a certain level, such as 4% of annual compensation. These employer contributions, like the employee contributions, are divisible marital assets if contributed during the marriage.

The contributions limits for a 401(k) are much higher than IRA limits: $19,000 per year, plus the employer match.

There are two types of 401(k)s:

• Traditional 401(k), funded with pre-tax dollars. As with a traditional IRA, funds withdrawn are taxable at the time of withdrawal.
• Roth 401(k), funded with post-tax dollars. As with a Roth IRA, all funds are tax-free at the time of withdrawal (both the contributions, plus any appreciation).

While conceptually similar to an IRA, a 401(k) is a qualified pension under ERISA, so will require a separate Qualified Domestic Relations Order, or QDRO, to divide.

Once divided, the non-employee spouse owns his/her interest in the 401(k), which then grows separately from the employee's portion. However, while the employee spouse can continue investing in his/her portion, the non-employee spouse former spouse may have to rollover the 401(k) into a different plan which allows investments.

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