A defined contribution plan is marital property; indeed, pensions and houses are the two most valuable assets a couple divide in a divorce.

In a divorce, the value of a defined contribution plan is easy to calculate: it is simply the balance in the account.

The valuation date of a defined contribution plan is very important because, unlike a defined benefit plan (the old fashioned company pension), the value of a defined contribution plan can fluctuate dramatically after a couple separate but before they divorce.

In dividing a defined contribution pension, courts are unanimous that they are not to be discounted to present value.

Like other tax-deferred or tax sheltered retirement plans (the IRA, SEPs (which are Simplified Employee Pension Plans), Keoghs, ESOPs, 401(k)s, 457s and 403(b)s), defined contribution plans carry penalties for early withdrawal. Courts largely agree that early retirement penalties should not be considered in the distribution without evidence that the distribution necessitates withdrawal.

Like other pension plans, classification disputes are very likely when a worker earned some of the benefits prior to his or her marriage.

The most common way to distribute these plans is a QDRO.

Divorcing couples can make a "trustee to trustee" transfer to the spouses qualified retirement plan, and couples who transfer pension benefits should state that the transfer is being made "trustee to trustee" in their separation agreement. A nonemployee spouse who takes the money directly is subject to a 20 percent withholding by the I.R.S.; therefore, these accounts must be rolled over when they are distributed as part of a divorce.

Very often in settlements, the worker employee retains the retirement plan and offsets its value with another asset. This offset method has advantages, but the nonparticipant loses the advantages of tax-deferred income accumulation.

These plans, promoted by corporate America because it relieved it of the legacy costs associated with defined benefit plans, transferred the burdens and risk from companies to employees. Parenthetically, it should be remembered that the first generation of workers to retire with these plans is still working, so it remains to be seen how these workers will do long term in comparison to their parents who enjoyed the benefits of defined benefit plans.

See ERISA, QDROs.

See also Defined Benefit Plan.

Your Suggestion

1. The Value of Benefit Plans in Divorce
   Defined benefit plans, such as the popular 401(k)s, have cash value today, and they can be distributed by using a Qualified Domestic Relations Order (QDRO). A portion of the defined contribution plan can be transferred to a former spouse without tax consequences, and some companies allow a plan to be divided so the former spouse has an account with the company.
   Contributed on 6/28/2007 by: DivorceDex.com Staff

   Category: Retirement Accounts   (Applicable in All States)

Contribute Tip/Fact