Understanding the Type of Retirement Plan to Be Divided in a Divorce

Dividing Divorce Assets

Understanding the Type of Retirement Plan to Be Divided in a Divorce
retirement assets

Misunderstanding the type of retirement plan to be divided in a divorce is one of the most common mistakes in divorce settlement agreements and even final judgments, since often times attorneys prepare the final judgment which the judge simply signs. It often erroneously states “retirement plan” without ever defining the type of plan(s) to be divided.

Retirement plans can be defined contribution plans, defined benefit plans or some type of hybrid. These plans are vastly different and have different implications when trying to divide them. In defined contribution plans, an employee and/or employer make contributions into an account maintained in the employee’s name. These plans have a known account balance at any given time, since the underlying account is nearly always invested in publicly traded securities. In a defined benefit plan, the employee accumulates credits towards their retirement based upon years  of service to an employer, and often based on compensation earned.

Typically, when a settlement agreement says the parties will “divide a retirement plan” it can be interpreted that the non-employee (spouse) is going to receive a lump sum amount. However, if the plan is a defined benefit plan (ie. traditional pension plan), they may not be receiving any money until the working party retires. Further, they may never receive a lump sum – but rather a monthly benefit payment.

Knowing the plan type and the benefit that can be divided (a lump sum now, a lump sum later or a stream of income) can substantially affect how you may choose to negotiate a resolution.

Tips:

* Include the plan type in your agreement if it is not part of the name of the plan.

* Describe in the agreement if the receiving party will get a lump sum now, a lump sum at a future date or payments over time and when those payments will begin and end.

EXAMPLE: The husband participates in the “ABC Company Pension Plan” which has a cash balance plan with a defined benefit component. If the parties desire to divide the cash balance equally and the defined benefit component based on the marital coverture, the language must be specific. In this case “divide the retirement plan equally” would not be an acceptable reference for the plan administrator to implement a QDRO.

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