Part of any divorce involves dividing marital property that the spouses accumulated during the course of the marriage. Houses, cars, clothes, and all sorts of personal property get divided between the parties during a divorce. But some of the largest assets a couple is likely to have at the time of a divorce – and some that many ex-spouses might not consider or think about how to divide – retirement funds and benefits that one or both ex-spouses accumulated during the marriage.
Division of Retirement Plans in Divorce – General
In most cases, retirement accounts and pensions will be divided between the parties as part of the divorce. The court will make the transfer based on a number of factors. Florida is what is known as an “equitable distribution” state. Some mistakenly believe that this means everything owned by the couple will be split 50/50 at the time of the divorce in every case. However this is not always true as courts are required to make a just and fair division of marital property, but not necessarily an equal division.
It is important to note that the entire value of a particular retirement plan or pension is not necessarily considered marital property and is subject to division. Instead, only that amount of the plan that was earned or built up during the course of the marriage is subject to division. Courts use various methods to come up with the amount of a retirement plan or pension that was earned during the course of the marriage and that is subject to division.
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Factors used by the courts in determining how to divide the marital property – including retirement benefits and pension plans – include:
- Length of the marriage;
- The overall economic circumstances of each spouse;
- Each spouse’s contributions to the marriage, including contributing to the improvement of marital or non-marital assets; and
- Each spouse’s debts and liabilities.
Division of retirement benefits also requires the preparation of a Qualified Domestic Relations Order, or QDRO. This order establishes an ex-spouse’s legal right to receive a certain percentage of a qualifying retirement plan’s balance or benefit payments and directs a retirement plan’s administrator to make payments accordingly. There can be significant tax consequences if a QDRO is not prepared or is prepared incorrectly.
Division of Specific Retirement Benefits: Traditional Retirement Accounts
Traditional retirement accounts include 401k plans, IRA and Roth IRA accounts, annuities, and other such accounts. These accounts can be opened and funded by an individual, but more typically a person owns a retirement account as a result of employment. As noted above, these accounts are generally considered marital property and are subject to equitable division unless the spouse in whose name the account is listed earned or accumulated value on the account prior to the marriage. These accounts will be divided along with all the other marital property based on the factors listed above, even if one spouse did not work at all.
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Defined Benefit Plan vs. Defined-Contribution Plan
Retirement accounts fall into two general categories: defined benefit plans and defined contribution plans. Understanding the difference between these two types of accounts can help ex-spouses better understand what type of benefits to which they are entitled after a divorce. A defined benefit plan is sometimes called a pension. This type of retirement account guarantees the account holder a specific sum of money upon retirement. The specific sum of money can be paid out either on a periodic basis or in one lump sum payment. In defined benefit plans, the account holder’s employer usually shoulders the full cost of this sort of plan.
For example, suppose John works for ABC Company for 20 years before retiring. When he was hired, as part of his orientation, John’s retirement benefits were explained to him. He was told that, after 20 years of employment, he could retire from ABC Company and receive retirement benefits in the form of monthly payments of $1,000. John’s retirement account with ABC Company is a defined-benefit plan.
On the other hand, a defined-contribution plan does not pay a specific benefit upon retirement but rather allows a person to save money for retirement in a tax-deferred account. A 401k is a typical example of a defined-contribution plan. Over time, the account holder (and sometimes an employer) makes contributions to the plan. At retirement, the account holder withdraws money from the account in order to cover living or other expenses.
Division of Traditional Retirement Accounts
Whether a particular account is a defined-benefit plan or a defined-contribution plan will affect how that plan’s proceeds are divided at divorce. In the case of a defined-benefit plan, the ex-spouse may be able to elect to receive a lump sum, “cash out” payment. In other words, the ex-spouse may be able to receive a portion or percentage of the present value of the account at the time of divorce. He or she could then spend it or reinvest it. Alternatively, the ex-spouse may elect to receive payments in the future at the time of retirement.
For defined-contribution plans, typically the account balance is multiplied by a percentage of vesting for the account. This is then divided between the parties. For instance, suppose John’s retirement account with his employer is a defined-contribution plan that fully vests after John has worked for the company for 10 years (suppose John worked for this company while he was married to Sue). After five years, John and Sue divorced. At the time of the divorce, John’s retirement plan has a value of $50,000. The plan’s value would typically be multiplied by the percentage that the plan is vested in John (here, 50 percent, as he has worked five years out of the required 10 for full vesting) in order to determine its present value. This result would then be divided between the parties. In this simple example, then, Sue would likely receive $12,500 upon the division of the account.
The division of government pensions in a Florida divorce can be tricky. This is because government pension plans (from federal, state, and local government bodies) are exempt from the Employee Retirement Income Security Act (ERISA), the law which establishes QDROs. Thus, government pension plan administrators are not necessarily required to accept QDROs, and plan administrators are not obligated to make direct payments of retirement benefits to the non-employee ex-spouse.
State and county workers in Florida are covered by the Florida Retirement System, which voluntarily accepts QDROs. Municipalities, however, are free to either accept or reject QDROs. Thus, in those cases in which a municipal retirement plan does not accept QDROs (and most municipalities in Florida do not), the non-employee spouse may wish to consider having the employee spouse’s municipal pension valued and then take some other asset of equal value. Otherwise, the parties may have to get creative in the drafting of court orders in order to ensure the non-employee spouse has access to the benefit to which he or she is entitled.
A similar situation is encountered with federal pensions. Like in the case of municipal pensions, the parties may have to be creative and precise in the way a court order is structured and worded so that the non-employee spouse is able to receive the benefits to which he or she is entitled.
Military Retirement Benefits
If a former spouse was in the military and is entitled to military retired pay, the other spouse may be entitled to receive some of these benefits in a divorce action. The Uniform Services Former Spouse Protection Act allows state courts to consider a service member’s military retired pay to be treated as marital property in a divorce.
There are certain general principles that courts follow when dividing military retired pay benefits in a divorce. First, the court may not award the non-service member spouse more than 50% of the service member’s retired pay benefits. For example, suppose John has military retired pay benefits of $1,500 per month. A court cannot award his ex-spouse Jane more than $750 of those benefits. Secondly, the Defense Finance and Accounting Service (DFAS) – the entity that would pay benefits to the service member’s former spouse – will not honor an award of military retired pay if the marriage did not last 10 years or more. Finally, the service member must have accumulated at least 10 years of creditable service during the course of the marriage.
Calculating military retired pay benefits in a divorce can be extremely complicated, requiring parties to consider a number of factors and potential issues. Like other aspects of property division in a divorce, it is best handled by an experienced family law or divorce attorney.
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As this brief overview has demonstrated, the way in which retirement benefits are divided as part of a Florida divorce can be quite complicated. Certain steps must be followed in order to ensure there is an equitable division of all assets and that unintended tax consequences are avoided. That is why so many individuals choose to hire an experienced Ayo and Iken divorce attorney to assist them in determining what benefits they are entitled to and securing those benefits through the divorce order.