Dividing Retirement Benefits During Divorce in Pennsylvania
Find out how retirement assets are treated during a divorce in Pennsylvania.
Generally, only “marital” retirement benefits (benefits acquired during the marriage) may be divided between spouses in a divorce; divorcing spouses usually get to keep their “separate” property benefits (benefits acquired before marriage, after separation, or by gift or inheritance).
For more complete information on marital versus separate property, see Division of Property in Pennsylvania, by Kristine Calalang.
The following is a step-by-step guide to dividing the marital portion of retirement benefits in divorce.
Step 1: Identify the type of retirement plan
Generally, there are two kinds of retirement plans: defined benefit retirement plans and defined contribution retirement plans. Defined benefit plans refer to pension plans or cash balance plans, but for the purposes of this article, we’ll focus on traditional pension plans.
Employers fund (contribute to) pension plans during the participant spouse’s employment. The participant spouse typically receives benefits after retirement (or after reaching a certain age) in the form of a lump-sum or fixed monthly amount.
Defined contribution plans include Individual Retirement Accounts (IRAs), 401(k) plans, and profit-sharing plans and are funded by the employer and the employee. Generally, defined contribution plans may be liquidated (cashed-out) prior to retirement, but doing so may trigger taxes and other penalties.
If you aren’t sure what type of retirement plan you’re dealing with, contact the plan administrator or the human resources department for the company that offers the benefits.
Step 2: Determine when the plan started and whether it’s “co-mingled”
If the plan was created before marriage, it will likely be “co-mingled,” which means it has both separate and marital elements (the marital element will be the increase in value - if any - during the marriage).
If a plan was created during marriage (from the date of marriage through the date of separation), the entire plan is generally included in the marital estate and subject to division. But, if contributions were made after separation, the plan is co-mingled, and the post-separation contributions must be kept separate from the marital portion during division.
If a plan was created after the date of separation, it’s generally considered non-marital and not included in the marital estate (unless the employee spouse used marital funds to create or fund the account after separation).
Step 3: Determine the value of the plan
Because pension plans are payable in the future, they can be difficult to value today; so, it’s very common for divorcing spouses (or their attorneys) to hire an expert, such as an actuary or pension evaluator, to value the plan. Actuaries typically calculate value using a formula based on various factors, including the employee spouse’s salary, years of employment, and life expectancy.
Defined contribution plan
If you have a defined contribution plan, such as a 401(k) that was created before marriage, the marital value of the plan (the portion subject to division) is the increase in value during marriage. To calculate this, subtract the value of the plan on the date of marriage from the value of the plan on the date of separation. These values can be found on account statements for the plan.
If you have a defined contribution plan that was created during the marriage, and the employee spouse or his/her employer contributed to it after the date of separation, you will need to calculate post-separation contributions (and any interest on them) and deduct them from the current value of the plan. Again, review account statements for the plan to determine values on certain dates, and be sure to keep a lookout for any loans against the plan that may reduce its value.
How do Courts Handle Retirement Benefits in a Divorce?
The division of retirement benefits is unpredictable because courts in Pennsylvania divide property using the “equitable distribution” method, which depends on numerous factors, including the length of the marriage and each spouse’s age, health, education, and income.
For a complete list of the factors courts consider, see Division of Property in Pennsylvania, by Kristine Calalang.
However, the following are some general rules to consider.
For pension plans, courts may order a deferred distribution or an immediate offset. A deferred distribution means that the value of the plan would be divided when received (e.g., at retirement or a certain age). For example, a plan could be created for the non-employee spouse that is identical to the employee spouse’s plan. When the non-employee spouse reaches a certain age (usually 65), he or she would begin receiving monthly payments from the plan. Courts can also order that the employee spouse pay the non-employee spouse a portion of his or her benefit when received in the future.
With an immediate offset, courts will consider the present value of the plan (as computed by an expert) and see if there are other assets to “offset” the fact that the employee spouse will keep the plan. For instance, if there are sufficient marital assets available, the court may order that the non-employee spouse receive enough marital assets to cover his or her rightful share of the present value of the pension (rightful share based on equitable distribution factors).
In cases where there aren’t enough assets to pay the non-employee’s share of the pension, or if the pension hasn’t vested, courts will often order deferred distribution.
Defined Contribution Plans
For defined contribution plans, courts may order the employee spouse to rollover a portion of the retirement account to the non-employee spouse (who could set up an IRA to receive the rollover). Rollovers are tax-free in the context of a divorce. A court could also order that the plan be liquidated (cashed-out) and the proceeds divided between the spouses. If this occurs, courts will consider any penalties and tax consequences of an early cash-out.
What is a QDRO?
A Qualified Domestic Relations Order (QDRO) is a special court order that enables retirement plan companies to divide retirement benefits in a divorce action. In essence, a QDRO sets forth the rights of each of the spouses and the value of their retirement benefits and includes specific instructions as to how the benefits should be distributed between the spouses. Certain types of plans cannot be divided without a QDRO, including pension plans, profit-sharing plans, and 401(k) plans.
Drafting a QDRO is no easy task. QDROs must meet highly technical legal requirements and include specific language depending on a particular company’s policies. If any part of a QDRO is incorrect, it may not be effective, which could result in the loss of important rights and benefits.
Because QDROs are so complicated, if you find that you need one in your divorce, you should definitely contact a family law attorney that specializes in drafting QDROs for help.