Retirement Benefits in Divorce

Retirement plans are one of the most misunderstood assets in a divorce. I've had some clients assume they don't have any right to a 401(k) because it's in the other spouse's name, while others are sure they're entitled to half the asset's full value. Neither is necessarily true.

Property is classified as either marital or separate in a divorce, and marital property is subject to distribution between spouses regardless of whose name it's held in. Separate property generally is not. In some cases, determining which category an asset falls into is relatively clear cut. If it was earned or purchased during the marriage, it's marital. If it was earned or purchased before the marriage or received by way of gift or inheritance made to one spouse, it's separate property unless it was comingled.

A complication arises with retirement benefits because they're often a bit of both. In legal speak, they're commingled. So yes, the non-earning spouse is entitled to a share of the other's retirement plan, even if it's in his name. And no, she may not be entitled to a share of its entire value. She has a right only to a share of the marital portion.

For illustrative purposes, let's say Joe begins working and contributing to a retirement plan when he's 25. Five years later, when he's 30, he marries Mary. Joe and Mary remain married for the next 20 years, then they divorce. Mary is entitled to a share of 80 percent of the plan's value at the time of the divorce -- that which was earned during the marriage, or 20 out of 25 years' total contributions and growth. The first five years' contributions are Joe's alone because he wasn't married at that time.

Determining the marital portion of a retirement benefit is only the first step in dividing the asset after divorce. The majority of retirement plans are covered by the Employee Retirement Income Security Act, or ERISA. Under ERISA, a retirement plan cannot divert funds to an alternate payee -- the non-earning spouse -- without a special court order called a qualified domestic relations order or QDRO (pronounced "quadro"). First, your divorce decree must specifically identify the plan and order that the non-earning spouse receive a certain percentage of its marital value. Your lawyer will then draw up a QDRO, or suggest that you hire a QDRO company to do so because these orders must meet exacting requirements. The QDRO must be approved by both the family court that granted the divorce and by the plan administrator. In the case of a pension, the administrator can now legally issue payments to the non-earning spouse at the time of the earning spouse's retirement, when he begins collecting. In the case of other retirement plans, the QDRO prevents the earning spouse from being hit by taxes and penalties for an early withdrawal that goes to his ex. If she immediately rolls it over into a retirement plan in her own name, typically no taxes or penalties come due. If she takes the money and spends it on her dream vacation, she'll owe the IRS.

If you're facing divorce and a retirement plan is at stake, call the Law Offices of Peter Van Aulen to schedule a consultation. Don't try to navigate these waters on your own. Your initial assumptions may be wrong, and even if they're right, you'll need experienced lawyer help to make sure you get or retain your rightful share.