Division of Retirement Benefits in Divorce
In general, retirement benefits acquired during a marriage are property subject to division during divorce. Retirement benefits include pensions, deferred compensation plans, profit-sharing plans, 401(k) plans, individual retirement accounts (IRAs), employee stock ownership plans (ESOPs), savings plans, stock options, and other similar plans. All jurisdictions divide retirement benefits that an employee will retain if she or he changes employers (vested retirement benefits), and nearly all jurisdictions divide unvested retirement benefits as well. After the court determines the benefits to which each spouse individually has earned, the method by which a court will divide retirement benefits depends on whether the retirement plan is a defined contribution plan or a defined benefit plan.
Division of Defined Contribution Plans
A defined contribution plan, also called a defined contribution pension plan or an individual account plan, is a retirement plan in which both the employee (participant) and the employer make contributions to the employee’s individual account. 29 USCA § 1002(34). Retirement benefits are based on the contributions made to the employee’s individual account, appreciation (gains or income) to the employee’s individual account, losses or expenses in the employee’s individual account, and other losses or expenses that may be allocated to the employee’s individual account.
Retirement benefits under a defined contribution plan are divided by splitting the employee’s individual account into a new individual account for the employee (representing the employee’s share of the benefits) and a new individual account for the employee’s former spouse (representing the ex-spouse’s share of the benefits). After the defined contribution plan is divided, each individual account operates independently, and each individual account owner is only entitled to the benefit of her or his future contributions to and appreciation or losses in her or his individual account.
Division of Defined Benefit Plans
In general, a defined benefit plan is a retirement plan other than a defined contribution plan. 29 USCA § 1002(35). Defined benefit plans are created by an employer and typically provide for retirement benefits for life or for a certain number of years after retirement. Retirement benefits under a defined benefit plan may provide for a lump sum payment ($75,000 upon retirement, for example), but most defined benefit plans provide for periodic payments ($10,000 per year starting at date of retirement, for example). The amount of retirement benefits under most defined benefit plans are based on formulas that typically consider length of employment, compensation, employee conduct, and other similar factors.
Retirement benefits under a defined benefit plan are typically divided by the immediate offset method or the deferred distribution method. Under the immediate offset method, the court determines the present value of the nonowning spouse’s share of the future retirement benefits and orders the owning spouse to make an immediate, lump sum payment in cash or other property to the nonowning spouse. Under the deferred distribution method, the court determines the nonowning spouse’s share of the future value of the retirement benefits and orders the owning spouse or plan administrator to make payments to the nonowning spouse when the retirement plans are distributed (typically at the owning spouse’s retirement).
Division of Benefits under Defined Benefit Plans in Divorce
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