An overview of the different types of retirement benefits and how they are divided during a divorce or legal separation.
Defined Benefit v. Defined Contribution Plans
Retirement plans fall into two overall categories: defined contribution plans and defined benefit plans. A defined-benefit plan, also called a pension, is a plan that pays you a specific amount of money, either monthly or in a lump sum, when you become eligible to retire. A formula based on how long you worked for the company and how much you were paid is needed to determine the value( of such plans. A defined contribution plan does not pay a specific benefit when you retire, but allows you to save money in a tax-deferred account such as an IRA, 401(K) or 403(B) plan. Such plans have readily known values.
Defined Contribution Plans
Retirement plans, if contributed to during the marriage, are divisible community property even if the member spouse does not retire for decades after the parties divorce. The community interest in a retirement account depends on when the member spouse first started to contribute to the plan and whether contributions were made during the marriage. Calculating the community interest in a retirement account depends on the type of account being considered. For example, defined contribution plans, such as IRA's, Thrift Savings Plans and 401(K)(s, have a known value: the balance in the account. The non-member spouse is entitled to 50% of the value of the member spouse's contributions to these kinds of plans made during the marriage. For example, Jane has a 401(K) with a balance of $5,000 when she marries John. Jane does not contribute to that account during the marriage, but it increases in value to $10,000 by the time the parties divorce. John is only entitled to 50% of the value of the contributions Jane made to the account during the marriage, which is zero. If Jane had contributed $10,000 to the 401(K) during the marriage and the 401(K) has a value at the time of divorce of $35,000, the determination of the community's interest therein is more complicated. The separate property interest (the initial $5,000) will have experienced its own gains and losses from market fluctuations over the years. The funds paid into the 401(K) during the marriage will have experienced their own market fluctuations. In the end, the 401(K) has a separate property value and a community interest value. In this example, the separate property interest, which is Jane's sole and separate property, may be worth $20,000, and the community interest, which is divided equally between the parties, is $12,000. If Jane had not contributed to the account until after the date of marriage, then the entire balance is community property and the finds therein are divided equally.
Defined Benefit Plans
The determination of the community interest in a defined benefit plan is a bit more complicated. Generally, the community interest in a defined benefit plan (pension) is determined by the following calculation: Number of month the parties were married while the member spouse contributed to the plan ( the total number of months the member spouse pays into the retirement plan by the time (s)he is eligible to retire. For example, John and Mary married in January of 2005. A petition for divorce was served on Mary in January of 2010. The parties were married for five years, or 60 months. John was employed by TEP in January of 2004 and began contributing to his pension that same month. John is eligible to retire on January 2024 after 20 years of service. John will have contributed to his pension for 20 years, or 240 months. The contributions John made to his pension both before and after his marriage to Mary are his sole and separate property and Mary is not entitled to receive any portion of the value of those contributions. To calculate the community interest in the pension, the mathematical formula above is applied: 60 months of marriage divided by 240 months of total contributions = .25 .25 = 25% of the monthly pension benefit. Mary is only entitled to one-half of the community interest in the monthly pension or 12.5% thereof. If John's monthly pension is $2,000, Mary is entitled to $250 per month. Many spouse's believe they are entitled to 50% of the member spouse's pension if the member started to contribute to the pension during the marriage. If the member spouse is retired or retiring at that time, this may be true, but consider the following example. John and Mary still married in January of 2005. Mary was hired by Raytheon in January of 2007. A petition for divorce was still served on Mary in January of 2010 and the parties were still married for five years, or 60 months. Often under these circumstances, the non-member spouse assumes he is entitled to 50% of Mary's retirement benefit, but that is generally incorrect. If Mary is not eligible to collect retirement until January of 2027, the mathematical formula is: 36 months of contributions while married (2007-2010) divided by 240 months of total contributions made = 15%. John is only entitled to one-half of that community interest in the plan of 7.5% by the time Mary retires.
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