A pension earned during the marriage is generally considered to be a joint asset of both spouses.
However, it is up to state divorce courts to decide whether and how pension assets are divided, and whether survivor benefits are payable. Except in the case of Social Security and Tier I Railroad Retirement benefits, a court order is necessary for someone who has been divorced to get a share of a pension.
The various types of employee benefits (see above) commonly available raise the following issues in divorce proceedings:
1.- Determining the community interest [vs the emplyee’s separate interest] in the employee spouse’s benefits
2.- Tax implications of dividing the community interest in the employee spouse’s benefits
3.- Effect on Spouses’ income in calculating child and spousal support.
If the Participant proposes to take all of the benefits of the pension, the first step is to determine its current value. For a defined contribution plan, e.g., an IRA or 401(k), the current value is easy to determine since it is reported to the account holder in monthly, quarterly, or annual statements. For a defined benefit plan, such as a corporate sponsored pension, unless the Participant is already in pay status, the current value needs to be determined by an expert known as an actuary, using an estimate of inflation from the present until the date that payments are to begin to be made, along with other factors. And, if the parties go to court, actuaries hired by each party may take contrary positions and testify to arrive at very different monetary figures, with the judge to decide.
If a pension is divided between divorcing spouses, it must generally be done at the time of divorce when other marital assets are divided. The court order or court approved property settlement that provides for a pension plan to make payments to a former spouse is called a domestic relations order.
Most retirement plans will pay pension benefits directly to divorced spouses if the domestic relations order meets certain requirements. In the case of private retirement plans, a domestic relations order (DRO) that meets these requirements is called a “Qualified Domestic Relations Order” or “QDRO.” In most cases, payments can be made for the life of the employee or retiree, and also after death (whether it occurs before or after retirement). Some state, city, county, and town retirement plans will not make direct payments to former spouses.
When the nonemployee spouse cashes out a defined contribution plan after division, the money the non-employee spouse takes will be subject to ordinary income taxation [but without an early withdrawal penalty]. The nonemployee spouse may otherwise choose to rollover their share into a tax-deferred IRA, and keeping the tax-deferred status until withdrawals are actually taken.
Anyone dealing with the evaluation and/or division of a pension or retirement plan would be wise to obtain a copy of the plan summary and other plan materials, and of relevant publications, such as “QDROs, The Division of Pensions through Qualified Domestic Relations Orders, published by the U.S. Department of Labor
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