NY Divorce - Division of Pensions and Defined Contribution Plans
In New York, pensions and retirement funds generally fall under one of two categories: defined contribution or defined benefit plans.
Defined Contribution Plans
A defined contribution plan includess an IRA, Simple IRA, 401k, SEP Account, and any other plan where the plan participant contributes to those funds. The funds do not pay out guaranteed sums of money at retirement. The plan participant can access their account information and determine what is in their account. The plan participant’s employer may also contribute sums to these plans on a periodic or other basis.
It is usually not difficult to divide a Defined Contribuion plan. If done with a Qualified Domestic Relations Order (QDRO), the monies in the plan are divided in whatever proportion is requested by the parties in their separation agreement or divorce documents, and the non participating spouse sets up a rollover IRA into which their funds are deposited. The transfer is not taxable.
Two issues must be addressed in the Separation Agreement with regard to these plans. The first is what happens to monies that may be due from the employer but not yet contributed. For example, if you and your spouse decide on February 1st to enter into a separation agreement and to equally divide the monies in a 401k, you need to consider whether there are monies due to be paid into that fund from the prior tax year. Many employers make those payments in the subsequent tax year. If you simply state that you are dividing what is in the account, the non participating spouse may be short changed.
The second issue is the consideration of appreciation or depreciation to a fund after the date of agreement. For example, if a 401k contains $40,000 and you and your spouse agree to equally divide that fund, you should not simply agree to give or take $20,000 as a one half share. That fund may change in value through appreciation or depreciation before a Qualified Domestic Relations Order can be prepared and finalized. Your agreement must clearly state what will happen to appreciation depreciation to that fund in the interim period.
Defined Benefit Plan
A defined benefit plan is more like a traditional pension which provides a set pension payment on a monthly or other periodic basis at the time of retirement. The plan participant may or may not contribute to this form of plan. These plans often provide many benefits in addition to the monthly payment paid at the time of retirement. For example, they may provide a pre-retirement death benefit, a post retirement death benefit, a single life annuity, a joint and survivor annuity, early retirement benefits, and more. Each plan has it’s own range of benefits and each plan has it’s own requirements for the preparation of a Qualified Domestic Relations Order.
The benefits that are available and the impact if those benefits are not preserved for a non participating spouse are significant in the realm of defined benefit plans. More important, if the benefits that are required by the non participating spouse are not set forth in the separation agreement, they can not be obtained in a Qualified Domestic Relations Order.
Some pensions allow what is called a "Separate Interest" pension. That option allows the non-participating spouse to receive their share of the pension when the participating spouse is eligible to retire. If the option selected in the QDRO is a "Shared Interest" pension, the non-participating spouse may not be able to collect their pension unless the participating spouse has actually retired.
A note of caution which is applicable to both defined contribution and defined benefit plans. If your separation agreement does not say that you get it, you do not get it. Thus, you cannot ask for appreciation on your funds after the fact. Those issues must be discussed and agreed upon before your separation agreement is finalized.