Are Retirement Plans Community Property?

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Like earnings, retirement benefits are considered a form of employment compensation. In a community property state such as California, the community earns an interest in retirement benefits. Upon a California divorce, and outside an premarital or postmarital agreement to the contrary, the law will award the community some of the benefits (to the extent earned during marriage and until the date of separation).

What are the Types of Retirement Plans?

1. Defined contribution plans

A defined contribution plan is a plan in which the employer deposits money into the account each month, matching the employee’s contributions. Examples include IRA, 401(k), and 403(b).

Because the amount of money in the account at any given time is clear and is reported to the account holder in statements, one can find out the rate of return on the investment vehicle and exactly how much was contributed into the plan between the date of marriage and the date of separation. Generally, each spouse gets half of the community property portion of the defined contribution plan, which is half of the amount contributed into the plan during marriage.

2. Defined benefit plans

A defined benefit plan is a promise by the employer to pay the employee a certain amount for the rest of the employee’s life, if the employee works for the employer for a certain number of years. This is most often seen in government agency retirement plans.

This retirement plan is more difficult to deal with at the time of divorce because there is no definite current value, the participant (the spouse earning the pension) may quit before vesting, and the participant’s life expectancy is unknown. This is where the experience of an expert family law attorney becomes especially useful.

It is important to note that non-vested pension plans are still community property assets. Pension rights, whether or not vested, are a property interest. To the extent that rights derive from employment during marriage, they are community property, subject to division at dissolution. The community gets a share of a pension that has not yet vested at the date of separation as long as the pension vests at some point. If the pension never vests, then the community gets nothing.

Community property pro rata share of the pension = (number of months employed to earn pension while married) / (total amount of months employed towards earning the pension from date of employment to date of retirement)

Under this equation, the non-participant spouse gets half of the community property pro rata share of the pension. For example, if the participant has to work for thirty years (360 months) to get the defined benefit plan and was married for ten of those years (120 months), the community property share of the monthly annuity would be 120/360 which is 1/3. If the retirement is $9,000 per month, the community share is $3,000 per month, and the non-participant spouse gets $1,500 per month.

If the participant spouse chooses to continue working beyond the retirement eligibility date, this decision cannot deprive the non-participant spouse from an equal share of community interest in the pension. The participant spouse is free to continue working, but if he/she does so, he/she must reimburse the non-participant spouse (out of pocket) for the share of the community property interest that is lost as a result of that decision.

As you can see, the issue of retirement benefits and who gets what in a divorce can be complicated. To discuss your situation with an experienced lawyer, contact the Los Angeles family attorneys at Walzer & Melcher today.