Chapter 14 Retirement Benefits: Who Gets What?

• Library: Divorce & Money (Nolo) (2020 Ed.)

CHAPTER 14: Retirement Benefits: Who Gets What?

Understanding Retirement Plans

Retirement Plans Are Not Created Equal

Some Plans Promise Better Tax Breaks Than Others

Divorce Leads to Division Decisions

Qualified Domestic Relations Orders

QDRO

What Constitutes a QDRO

Interim QDROs

The Legal Value of Your Retirement Plans

Defined Contribution Plans, Personal Annuities, and IRAs

Defined Benefit Plans

Determining the Marital Portion

The Financial Value of Your Retirement Plans

Income Tax Considerations

Charges and Penalties

Calculating the Financial Value of Plans

Defined Contribution Plans

Defined Benefit Plans

Additional Financial Factors Affecting Retirement Plan Divisions

Vesting

Benefits in Payout Status

Double Payments

Cost of Living Adjustments

Access to Cash

Tax Consequences in Dividing Benefits

The Division Decision: Now or in the Future

IRAs

Defined Contribution Plans and TSAs

Defined Benefit Plans

Questions to Ask an Attorney

Whether your retirement benefits come from your own job, your spouse's job, or other retirement plans, those benefits must be divided when you divorce.

SKIP AHEAD

If neither you nor your spouse has a retirement plan, skip ahead to Chapter 15.

Under the best of circumstances, planning for your retirement is difficult. You may not have given much thought to retirement planning, hoping it would somehow take care of itself. But it won't. You've got to give some serious consideration to when you will retire, how much income you'll need during retirement, the sources for that income, and how you will divide retirement benefits with your ex-spouse.

Retirement planning is a relatively new concept. Generations ago, few people had to worry about late-life security because most just didn't live that long. Today, an entire industry has emerged to provide retirement planning services to aging baby boomers. The pressure to create sound retirement plans can be intense, and divorce adds another layer of complexity.

In most states, retirement plans are treated as property to divide at divorce. Naturally, you may be emotionally attached to the retirement benefits that you worked so hard to earn or feel that you're entitled to as part of your commitment to the marriage. Take heart. Retirement benefits can serve as significant bargaining chips when spouses trade assets in the final property settlement.

RESOURCE

We only introduce the concept of retirement planning in this chapter. For more information, here are some resources: Work Less, Live More, by Bob Clyatt (Nolo); IRAs, 401(k)s & Other Retirement Plans: Strategies for Taking Your Money Out, by Twila Slesnick, Ph.D., EA, and John Suttle, CPA (Nolo).

Planning for Your Retirement

No matter how you and your soon-to-be ex-spouse divide the retirement benefits, it is important now to plan for your own retirement. Here's why, and what you will need to do:

• Americans are living longer. You should plan for an income stream through at least age 90.
• The responsibility for providing retirement income is being shifted slowly but surely by employers onto the shoulders of employees. Take advantage of any and all retirement plans available to you now through your employer. Once your credit cards are paid off, contribute more—the maximum allowed if possible.
• You have more investment choices now than ever before in 401(k) plans and self-directed plans. Learn what you need to know about available mutual funds, as well as their objectives and performance, so you can make intelligent decisions.
• If you are not part of the "triple-squeeze" generation—supporting an aging parent, putting a child through college, and trying to save for your own retirement simultaneously—you may be soon. Be sure to consider these factors as you make your decisions about splitting retirement plans in divorce.

Understanding Retirement Plans

Almost every book and expert on the subject of retirement planning uses a different system to categorize plans. In the pages that follow, we separate plans into several major categories and provide a table that gives detailed information on the various retirement plans. Once you've determined which plans you and your spouse have, you can focus on the sections in this chapter that apply to you.

The table also specifies how, under the law, particular plans may be divided at divorce. To divide some types of plans, you must get a special kind of court order called a QDRO (pronounced "quadro")—a Qualified Domestic Relations Order (see below). Other retirement assets can be divided by a court order or judgment other than a QDRO. And some kinds of retirement assets can't be divided at divorce.

One distinction we make in this chapter is between defined benefit plans and defined contribution plans. In defined benefit plans, also called pension plans, an employer provides a fixed amount to an employee at retirement, usually in monthly payments that continue until the employee's death. In defined contribution plans, which include 401(k) plans, the employee—and often the employer—contribute money into the employee's retirement account, which grows over time. IRAs—or Individual Retirement Accounts—are similar to defined contribution plans, although dividing the assets at divorce doesn't require a QDRO.

If you or your spouse has a defined benefit plan, it's difficult to determine just how much the plan is worth today. That's because the plan is designed to pay out in the future, and inflation causes today's dollars to have a different value than they'll have 20 or 30 years from now. It takes an expert, such as an actuary, to find the current value of this kind of plan. That makes dividing the asset a complicated task, as we'll see. It's a lot easier to tell how much a defined contribution plan or an IRA is worth today: As the account grows, the current value is reported to the account holder in regular statements.

EB RESOURCE

The Internet is a terrific resource for gathering additional information. Sites such as www.morningstar.com and www.yahoo.com offer valuable insights into and analysis of many different types of retirement funds. Be sure to check whether your retirement plan has information available online. Many company and government plan sponsors provide up-to-date account values and information through their websites or through automated phone systems.

Employer-Sponsored Defined Contribution Plans
Type of Plan	Description	Type of Order Necessary to Divide Plan
Salary Savings/401(k), 403(b), and 457 plans	Employee contributes a portion of salary on a pretax basis, which may be matched in full or in part by the employer. The employee may defer up to $19,000 annually (as of 2019) or $32,000 if age 50 or older.	QDRO
Thrift Plan	Employee contributes a portion of salary on an after-tax basis, which may be matched in full or in part by the employer. Because the employee's contribution is made on an after-tax basis, distributions (payouts) may be partially tax free.	QDRO
Profit-Sharing Plan	Employer contributes to the employee's account only if company is profitable. Amount of contribution is based on either a fixed or a discretionary formula.	QDRO
Money Purchase Plan	Employer contributes a fixed percentage of salary to employee's account every year. Employer contribution is mandatory, regardless of whether company makes a profit.	QDRO
Employee Stock Ownership Plan (ESOP)	Contributions are a percentage of salary and are used to purchase company stock. The stock is held in trust for the employee, who receives the accumulated interest in the plan at termination of employment in the form of stock or cash. The plan provisions define the rights of the employee to exercise stock options.	QDRO
Tax-Sheltered Annuities (TSAs)	TSAs are a retirement vehicle allowing teachers, public school system employees, and employees of nonprofit organizations to contribute a portion of salary into the annuity. If your TSA is through the Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF), you can get detailed information, including account values, on the Web at www.tiaa.org.	QDRO

Employer-Sponsored IRAs
Type of Plan	Description	Type of Order Necessary to Divide Plan
Simplified Employee Pension IRA (SEP-IRA)	SEP-IRAs are retirement plans in the form of individual retirement accounts. An early withdrawal penalty of 10% applies to SEP-IRAS as well as traditional IRAs and Roth IRAs. The maximum contribution to a SEP-IRA stood at 25% or $56,000 for 2019.	A regular court order or judgment divides these plans.
Salary Reduction-Simplified Employee Pension IRA (SAR-IRA)	These retirement plans were available prior to 1997 and included a salary reduction agreement in which the employee could elect to have a portion of salary contributed to a SEP-IRA on a pretax basis.	A regular court order or judgment divides these plans.
SIMPLE IRA (Simplified Incentive Match Plans for Employees)	SIMPLE IRA involves a written salary reduction agreement between the employee and employer that allows the employee-participant to reduce compensation and have the employer contribute the difference to a SIMPLE IRA on the employee's behalf. (Employees may elect not to contribute.) The employer makes matching contributions or nonelective contributions. Nonelective contributions are made for each eligible employee, even if the employee does not elect to contribute. The total employee contribution (from salary reduction) allowed is $13,000 in 2019 (workers over age 50 are allowed to contribute another $3,000). Nonelective contributions are limited to 2% of compensation. The matching contribution is the lesser of the employee contribution or 3% of the employee's annual salary. The distribution rules applicable to a traditional IRA also apply to a SIMPLE IRA, except that if the employee withdraws money prematurely within two years after beginning...