If you and your spouse are going through a divorce in Pennsylvania and you have retirement accounts like pensions, IRAs, and 401(k)s, you likely have questions and concerns about how your accounts will be divided in the divorce. All property and assets acquired during a marriage are subject to property division in divorce. You need to understand how the court considers property as separate or co-mingled and how you can protect your hard-earned assets for the future.
You also need to consult an experienced family law attorney in Pennsylvania for an explanation of your rights and options, and representation throughout the property division and divorce processes.
Dividing Retirement Plans
Property division and alimony are the most commonly discussed aspects of spreading assets and finances post-divorce. However, couples may fail to consider dividing the intangible assets of a retirement plan and benefits. Like bank accounts and other finances, spouses often share these retirement benefits during their marriage, and during a divorce, couples must split any benefits the court deems as marital property.
When dividing retirement plans, there are a few important things to remember. The process can be complex, and sometimes, these benefits and plans must be reviewed to see if they are eligible for division or if they belong to one spouse specifically.
Determining What Plans You Must Divide
During a divorce, spouses may keep their separate property, which is property acquired before the marriage that was kept separate from marital property. Martial property refers to any assets acquired during the marriage that both spouses shared equally. The benefits plan must be considered as a part of the marital property; otherwise, there is no negotiating.
There are two types of retirement plans: benefit plans and contribution plans. Benefit plans include pensions and cash balance plans. Contribution plans include things like IRAs and 401(k) plans that an employee and their employer can pay into.
Typically, most plans that are in effect before a person's marriage are thought of as co-mingled, meaning that the plan itself is simultaneously marital property and non-marital property. The marital aspect will typically only include any growth the plan went through during the marriage. A plan created during the marriage would be considered marital property, which will make it subject to be divided between the two parties unless contributions were made after the two spouses separated. Finally, any plans created and contributed to after the spouses have separated will normally be considered non-marital property.
Since this can be confusing, it may help to consider the following example:
Say your spouse has a retirement account in their name, and they created the plan before your marriage. Any portion of the plan created before you got married will be considered separate property, and any portion that increased over the time of your marriage will be considered marital property. Only that portion of the martial property will be subject to division.
Conversely, your spouse may not have created their retirement plan until sometime after your marriage. Maybe they got a job five years after your marriage, and you have been married for a total of 15 years. Your spouse's entire retirement plan would be considered marital property and subject to division.
Any contributions made after your separation date would belong to your spouse solely and would not be subject to division. The same holds true if they created their retirement plan after your formal separation.
Pennsylvania Is an Equitable Distribution State
Pennsylvania follows an equitable distribution model when dividing marital property and assets in a divorce. Equitable distribution means that spouses won't necessarily receive an even 50/50 split of property, but the court will award property in a manner that is fair and equitable.
For instance, maybe your spouse would like to remain in the family home and be the sole owner of the residence. Your house appraises for $500,000, and you have $500,000 in your 401(k). The court may award you the full share of your 401(k) while awarding your spouse full ownership of the home and no claim to your retirement account. You would also not be able to claim the home and would have to sign ownership over to your spouse.
The court may consider numerous factors when determining equitable distribution that include the length of the marriage, each spouse's age, each spouse's health, education, income, and other factors.
Pension and Defined Contribution Plans
The court has different methods for how pensions are divided versus how defined contribution plans are divided.
Pension plans are those payable in the future, such as when the person retires or reaches a certain age (65 years, for instance). Often, these types of plans can be hard to calculate at the time of divorce, and many people rely on actuaries and other financial analysts to help them determine the plan's value. Other factors considered are the employee's spouse's years of employment, salary, and life expectancy.
Pension plans can be divided through a deferred distribution or an immediate offset. Deferred distribution divides the plan into two separate plans, one for each spouse, according to the court's ruling. When the non-employee spouse reaches a certain age, e.g., 65, they will begin receiving payments from the plan. The court may also order the employee spouse to pay the other spouse a portion of their benefits when they receive them in the future.
For situations where the employee spouse wishes to keep their entire pension, the court may use an immediate offset. This is when the court considers the present value of the plan as determined by a financial expert. It will then look to see if there are other marital assets that can "offset" the value the non-employee spouse will lose if the employee spouse keeps their entire pension. The court will divide other assets to offset the value of the plan.
Defined contribution plans are those that employees pay into over the course of their employment, like a 401(k), often with matching employer contributions. Calculating the plan portions subject to division is a little more straightforward. You can determine the marital portion by simply dividing the value of the plan when you got married by its value on the date of your separation.
For contribution plans, a portion of the retirement account will either be rolled over into the other spouse's own plan, or the full account will be "cashed out" with the total amount divided between the two spouses. If you roll over funds into another tax-deferred instrument like an IRA, you won't have to pay taxes on the funds. If you receive cash value for the plan, you will have to pay taxes along with other penalties for early withdrawal.
Qualified Domestic Relations Orders (QDRO)
Courts often use Qualified Domestic Relations Orders (QDRO) when dividing retirement accounts. A QDRO allows the finance companies of the retirement plans to divide the benefits between the spouses. Additionally, a QDRO can have a minor child named as the beneficiary and provide child support if necessary. However, a minor child will need an adult parent or guardian to act as their trustee and receive the funds.
A non-employee spouse can roll over funds from a retirement account into a tax-deferred retirement account without tax penalties. The IRS will consider them the same as if they were an employee spouse, and it includes plans covered by the Employee Retirement Income Security Act (ERISA), including 401(k)s. QDROs do not cover IRAs.
However, the alternate recipient of any early withdrawals from the plan will be responsible for paying taxes on the money they received, and any distributions made to a non-employee spouse without a QDRO will be subject to taxes.
QDROs are very complex and are not simple to either obtain or enforce, so you need to consult with an experienced family law attorney in Pennsylvania for a complete review of your case and whether a QDRO will benefit you.
Get Help From an Experienced Family Law Attorney in Pennsylvania
No matter how long you were married or how long you and your spouse worked, you sacrificed a lot for your marriage, and you deserve all you are entitled to. The division of pensions, IRAs, and 401(k)s is complicated, and you need an attorney on your side to help you make the most informed decisions and fight to help you get all you deserve.
Attorney Joseph D. Lento has many years of experience helping clients in Pennsylvania with all aspects of their divorce, including the division of retirement accounts, QRDOs, and other areas. He has extensive knowledge of Pennsylvania's family laws, and he can help you understand your rights and options. He can also fight hard for you throughout the process and help ensure you get the best results.
Contact Attorney Lento and the Family Law Team at the Lento Law Firm today at 888-535-3686 or through our online contact form.