How Pension Plans and Retirement Plans are Divided During Divorce


If you are going through divorce, it is crucial that you do not neglect how you or your spouse’s retirement assets are divided. An individual’s retirement accounts – typically a pension, a 401k and/or an IRA (individual retirement account) - may be his or her largest asset. When a couple divorces, they typically divide their assets as part of their separation agreement. In most cases, this should include assets either spouse may have in a pension plan or any other retirement program.

The key to dividing an employer-sponsored retirement account is a legal document called a Qualified Domestic Relations Order, or QDRO, which establishes a former spouse's right to a portion of his or her ex's retirement benefits. It also protects the account owner from paying taxes and early-withdrawal penalties on assets transferred to a former spouse.

An order should be prepared by an experienced attorney, approved by a court, and submitted to the administrator of your former spouse's 401(k), 403(b), 457, employee stock-ownership, profit-sharing or defined-benefit pension plan. Generally, you'll need a separate QDRO for each account an ex-spouse owns

One of the aspects of dividing retirement accounts in a divorce involves determining exactly how much money is subject to division. This is due to factors such as whether an account is fully vested, how much the account grew during the marriage, and how long you were married as compared to how long you or your ex owned the retirement plan.

Pension Plans can be more complicated than other retirement accounts. In order to determine the fair value of a pension that is subject to equitable distribution, the courts will typically consider factors such as:

  • When the employed spouse will be eligible to retire.

  • The employed spouse’s life expectancy.

  • The anticipated value of the pension on the earliest retirement date.

  • The discounted value of the pension at the date of separation.

  • Contingencies that may reduce the pension value.

A QDRO must spell out the formula to be used to divide the assets—whether each portion should be calculated as a percentage of the balance or a dollar amount and whether investment gains or losses should be shared equally or disproportionately until funds are transferred to a separate account for the nonemployee spouse

Common mistakes divorce lawyers make regarding pensions that are particularly damaging to either of the spouse’s interests include:

  • failing to ask for the important information about a spouse's benefits and retirement 

  • failing to prepare any pension order

  • failing to obtain information about every retirement benefit that might be marital property

  • failing to obtain information about all pension plans provisions

  • failing to ask for survivor benefit or not mentioning that none are available

  • failing to explain how retirement benefits are usually divided under state law

  • failing to explain what a former spouse might do to reduce or eliminate benefits to the former partner

  • failing to explain how remarriage might affect benefits

  • failing to explore the unusual legal requirements or loopholes that could result in the pension order being rejected by the plan administrator

  • failing to have the proposed pension order pre-approved before being sent to the court

  • failing to make sure the final pension order is sent to the plan and accepted

  • failing to explain Social Security benefits

Due to these and other complexities, it is critical to seek help from an experienced attorney who has access to financial experts, CDFAs such as myself, when attempting to establish the value of retirement benefits in a divorce. That is true whether you are the divorcing spouse who has earned retirement benefits or whether you are the spouse who stands to receive part of your ex-spouse’s retirement benefits. Depending on how the assets are transferred, the resulting tax liabilities may vary greatly.

As a final note, be sure when considering or going through a divorce to remember to include pensions and all retirement plans in the financial planning process.

If you’d like to schedule a free phone consult, please give me a call at 907-347-3860 or click here to schedule online. 

Tags: pension, retirement plans, divorce planning, divorce financial planning, 401K, QDRO

This information is not intended to be a substitute for seeking legal advice from an attorney. For legal or tax advice please seek the services of a qualified attorney and/or qualified tax professional.

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Kimberly Surber

Certified Divorce Financial Analyst®

Serving Riverside County, San Diego County


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