For many married couples, planning for the future includes saving money for retirement. This can include 401(k) accounts and pension plans. And just like other assets, should a couple of divorce, any retirement funds they have are often deemed part of the marital estate that must be divided equitably between the two. Unlike other assets, however, dividing pension accounts can be more complex.
Determining Pension Value
There are two things that need to be considered when determining the value of a pension in order to determine how it should be divided in the divorce. The first issue the court must decide is whether or not the pension is, in fact, marital property. In most situations, the value of the pension that was accrued during the marriage is considered marital property, while the value of any portion of the pension that was accrued prior to the marriage is considered separate property. There are situations where the judge may determine that all the pension funds have been commingled and are therefore all part of the marital estate.
The second issue the court will consider is what type of pension plan it is. One type of pension plan is referred to as a defined contribution. This is where a specific amount is deducted from the employee’s paycheck each pay period, such as a 401(k) plan or profit-sharing plan. Since these plans have a specific dollar amount, they are fairly easy to value for the purpose of dividing assets.
The second type of pension plan is referred to as defined benefit. These types of plans are funded by the employers and payouts are calculated with a formula that uses the employee’s age, salary, and how long they worked for the company. These types of plans usually require a financial professional to determine the pension’s value for the purpose of the division of assets.
Once the court has determined the value of the pension and how it will be divided between the couple, it will be necessary to submit a Qualified Domestic Relations Order (QDRO) in order to establish one spouse as an alternate payee who is entitled to receive a share of the other spouse’s pension....