The division of assets during a divorce is often one of the more complicated parts of the divorce process. It also happens to weigh the most heavily on many people’s minds. One particular issue that occurs commonly with asset division is how to divide the retirement plans. Pensions, 401(k)s, and IRAs are not the same as other marital property, and require specialized knowledge as to how the plans operate and the tax laws relating to their division.
Community Property Interest in Retirement Plans
The State of California operates under the community property presumption which says that all property acquired by either spouse during marriage is community property and will be divided equally, unless the property was acquired by gift or inheritance or was the income or accumulations on premarital property (in which case it is separate property and not subject to division). A California court must divide community property evenly between the two spouses. This can be somewhat complicated by the long-term nature of retirement plans, as the right to receive the retirement benefit may not have vested as of time of divorce or the right to receive money from the plan may be years away when the spouse retires. Rules have developed under California law for dealing with these situations. The goal is to protect the community interest in the plan of the non-participant spouse (the spouse who is not a member of the retirement plan). The effect of these rules, though, may seem unfair to the participant spouse, who must continue working for the company after separation for the interest to vest or increase in value.
The method of division, and the valuation, of these plans depends on what type of retirement plan is involved. There are two basic types of plans: the defined benefit pension plan and the defined contribution plan.
It is possible for the spouse who earned the benefits to propose a buyout of the entire plan instead of splitting it with the other spouse. However, such a buyout can be complicated.
Fundamentally, a buyout is simply when one spouse agrees to pay some amount of money or property in exchange for the full rights to the retirement plan. While this may seem simple in principle, it can be difficult to accurately assess the value of the retirement plan to ensure that an even exchange occurs. This is because the value of the plan today would be different from the value of the plan when it is actually accessible for several reasons.
First, there is the issue of inflation, which means that over time it is likely that the same amount of money will have less purchasing power. Second, the court may take into account the “time value” of money. This means that the judge could recognize that receiving $100 today is more valuable than receiving $100 one year from now, because that first $100 will have a year to accrue interest or other returns as an investment. Finally, the judge could also be influenced by the riskiness of the retirement plan. Many retirement plans, like pensions, require the spouse’s employer to pay out benefits many years in the future. Since the company might file for bankruptcy, or otherwise fail to fulfill its pension obligations, the court may find it fair to share that risk between the spouses.
However, even after accounting for all these changes, federal law may impose another type of complexity on the division of retirement plans known as a qualified domestic relations order.
Qualified Domestic Relations Orders
A qualified domestic relations order (QDRO) is a special safeguard put in place by the government to protect certain types of retirement plans like 401(k)s, profit sharing plans, and employee stock ownership plans. The federal government was concerned that people might sell their retirement plans for up-front cash when they were young and then have nothing to live on when they were older. So, the government passed a law known as the Employee Retirement Income Security Act (ERISA), which made it difficult for the person administering the plan to pay benefits to anyone other than the employee. However, the government did make an exception in the case of divorce, and allows the court to create a QRDO, which empowers the plan’s administrator to pay benefits to the employee’s ex-spouse.
If you are concerned about protecting your retirement plans or other assets during a divorce, reach out to a skilled California divorce lawyer. The team at Walzer & Melcher can help ensure that the division of marital assets is fair and respects your rights.