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In the first installment of what is planned to be a series on dividing retirement / pension benefits during a divorce settlement, we look briefly at the common questions of dividing retirement and pension plans between spouses. The parties’ retirement benefits is an important consideration when equitably dividing marital property, because, like the marital residence, retirement benefits are often the largest asset or assets of the parties. Therefore, dividing these plans or funds becomes enormously important. So, let’s now address some common questions.
Is my retirement / pension considered marital property?
As the intro gave away: yes. Just as with any other asset of value that is acquired during the marriage, generally, retirement benefits accrued during the marriage are considered to be “marital assets” and must be divided equally between the parties. If a spouse is working during the marriage and this results in the accrual of retirement benefits, the law sees it as if the non-working spouse contributed equally to the creation of those benefits.
This frequently makes it difficult for a court to carry out its statutory mandate of dividing all marital property equally. Technically, the non-working spouse is entitled to at least a portion of the employed-spouse’s pension fund (as marital property), but the money may not be easily accessible at the time of divorce. Because courts like to maximize the value of all retirement and pension funds, it is normally preferable to avoid causing the withdrawal of the accrued monies, and leave the fund growing in the name of the working spouse. Fees, penalties and taxes can often destroy a pension that is withdrawn when it is not fully matured. But, the problem is that sometimes there simply isn’t other marital property to award to the other (non-earning) spouse at the time of the divorce that will adequately compensate that spouse for his or her rightful portion of a retirement fund. For this reason, valuing and dividing retirement benefits should be one of the first issues contemplated by a divorcing party.
Is it true that my spouse is entitled to half of my pension?
No. Not always. Only the portion of the retirement fund that was contributed to or earned during the marriage is considered “marital property” and subject to division between the parties. The portion of the retirement fund that was earned by the working spouse while unmarried is considered that party’s separate property and the other spouse has no interest in that money. Therefore, the first step is to determine what portion of the retirement fund is marital and what portion is separate property.
How do you value the portion of the retirement fund that is considered “marital”?
In determining the portion of a pension or retirement plan that is considered a “marital asset” and subject to division between the parties, the court should calculate the ratio of the number of years the employed-spouse worked during the marriage to the total number of years he or she worked at the qualifying employment to earn the pension. Only the portion of the pension that was earned during the marriage is a marital asset, and the spouse of the employee is only entitled to a proportionate share of the marital asset.
Example – Employed spouse works 25 years to earn a vested pension of $100,000. 10 of these years were worked during the marriage. This equates to a 40% ratio, and only $40,000 of the pension is a martial asset. Because the division of marital property always begins with an equal division, the non-employed spouse would typically be entitled to $20,000 in this scenario.
Now, assuming the court doesn’t want to destroy the fund if it would be better for the employed spouse to contribute for 30 years, you see where it could be difficult to off-set this amount with other marital property? How many couples have $20,000 (in liquid form, moreover) lying around to award the other spouse his or her fair share of this fund at the point of divorce?
Are Social Security Benefits Divided?
No. Not directly, anyway. Social security retirement benefits are not considered marital assets to be divided when a couple divorces. A court cannot distribute a portion of one spouse’s SS benefits to the other spouse directly. However, the court does consider the SS benefits when making an equitable division of retirement benefits overall – See Smith v. Smith (1993, Franklin Co) 632 N.E.2d 555 (“while not divisible as a marital asset, SS benefits must be considered when equitably dividing pension benefits”).
Are State and federal retirement plans treated differently?
Yes. The law related to state and federal retirement plans will be the subject of a later post. There are specific rules that govern certain public-forms of pensions, such as military pensions, State pension plans (e.g., PERS) and deferred compensation plans. Those forms of retirement benefits are impacted by specific federal and state statutes that must be consulted where applicable.
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