The more knowledgeable you are about you and your spouse’s retirement benefits, the smoother your journey to division of these assets will be during and post-divorce. At Boyle, Feinberg Sharma, P.C., we are well-versed on the variety of retirement benefits available, even non-qualified plans.
Types of Plans
There are two main types of retirement plans: the defined benefit plan (DBP) and the defined contribution plan (DCP). When most people think of retirement plans, they are usually thinking of defined contribution plans which include Individual Retirement Accounts (IRAs), 401(k) and 403(b) accounts, and profit-sharing plans. A defined contribution plan is an employer sponsored plan with an individual account balance for each participant. The benefit is solely based on contributions made by either or both the employee and the employer into an individual account, and the investment gains or losses on those funds. These types of plans are normally not taxed at the time of contribution but are taxed when the withdrawals are made.
A defined benefit plan often is referred to as a “pension plan.” These types of plans calculate benefits using a fixed formula to calculate monthly lifetime payments that typically factor in an average over the last five years of salary, and the number of years of service with the employer.
Non-qualified plans are awarded to very high-level executives. Often, these plans are not “funded” but remain a liability on the corporation books, paid upon retirement. Today, Boyle Feinberg Sharma, P.C. is finding more companies willing to accept Domestic Relations Orders to secure the rights of the non-employee former spouse. However, no such requirement is mandated.
How Your Account is Valued
A defined contribution plan is much easier to value as an exact cash balance exists, making it an easier asset to split. Defined contribution plans have a value as of a certain date, which can be divided as either a percentage or dollar amount to the other spouse. Care must be taken to divide increases or losses that occur between the valuation date and the date of distribution.
A defined benefit plan is valued as a future stream of payments based on a benefit formula calculated by actuaries. Many defined benefit pension plans will not pay a lump-sum amount and will only pay a spouse on a monthly basis for a lifetime, starting around retirement age. Plans have the right to decide if they will allow a lump sum payment or not.
How Your Account is Divided
When dividing assets, you will consider whether to divide retirement accounts or whether to negotiate a trade-off of other types of assets such as a home. Be cautious when contemplating a trade-off of this type. Remember that defined contribution retirement accounts will be taxed as income when funds are withdrawn, so they have a “pre-taxed” value, whereas a home’s net value is paid from post-tax currency, which is not inclusive of possible capital gains on the home.
Retirement accounts can be both “marital” and “nonmarital” in nature. If retirement benefits were earned prior to the marriage, they will be considered nonmarital – and thus, not divisible. This can complicate the division process. With a defined contribution plan, it often is possible to determine the account balance at the time of the marriage. Tracing the growth (or losses) of those funds is best left to the accountants. Anything contributed after this date is considered marital. When it is not possible to ascertain the balance at the time of the marriage, a formula can be used to determine the nonmarital portion of an account, but beware as this is an imperfect method.
Defined benefit plans also can be both “marital” and “nonmarital.” The determination of the nonmarital portion is more complicated when valuing this type of asset. The portion to be divided is based on the percentage of time that the employee spouse participated in a plan during the marriage. This provides an ever-decreasing percentage of the future benefit to the former spouse; however, it is likely that the final benefit awarded will continue to grow after divorce. When valuing and dividing a pension plan, it is important not to forget benefits that exist outside of the obvious “value” such as cost of living adjustments, surviving spouse benefits, and early retirement buyouts.
The instrument that allows division of QUALIFIED plans (401k’s; profit sharing plans; 403b’s) is a Domestic Relations Order which the Plan Administrator “Qualifies”. Then the company will divide the benefits and the employee has no control over the division. You will hear your attorney use the word, “QDRO” to reference this document. IRA’s do not require a QDRO. A certified copy of your Judgment and Marital Settlement Agreement is what is required to divide an IRA.
Often, Boyle Feinberg Sharma, P.C. (BFS) will refer clients out to a pension specialist to perfect the QDRO. This saves you money. We have found that our fees for a QDRO often far exceed what specialists charge.
Contact our family lawyer magazine to schedule an initial consultation with one of our family law attorneys located in Chicago and Arlington Heights about your questions regarding division of retirement benefits in divorce. You can reach us by phone at 312-376-8860 or 847-394-3940, or via email.