Divorce and Pension Payout: 9 Things You Need To Know

Divorce and Pension Payout: 9 Things You Need To Know

  • Afsana Chowdhury

Dividing assets during a divorce is generally a complex situation, even in the simplest of divorces. Adding pension plans into the mix only serves to make it even more confusing. While pensions earned during your marriage are usually considered to be joint assets, how they are divided and the method of pension payout after a divorce can depend on a multitude of factors.

9 Things You Need to Know About Divorce and Pension Payout

1. Only a Portion of Your Pension May Be Considered Joint Property

Pensions can be made up of marital (known in other states as community) property, separate property, or both. If you started earning your pension before you were married, the amount earned prior to marriage is usually considered separate property. If you earned your pension while you were married, the amount earned during that time is usually considered marital property.

If you continued to earn pension funds after you legally separated, those earnings are usually considered separate property. Most people’s pensions are a combination of separate and marital property. A divorce lawyer who understands pensions can help you determine how much of your pension may be considered marital property.

2. State Laws Impact the Division

Once you determine how much of your pension will be deemed marital property, states differ on how that should be divided. Depending on the laws of your state, the marital property portion will either be split 50/50 or equitably. If you were to live in a community property state, the court would divide marital property equally, so you will each get 50% of that portion of your pension.

If you live in an equitable distribution state (like here in Virginia), the court examines the circumstances of your case to establish a fair division of property.

Factors in determining an equitable distribution include how long your marriage lasted, the income and property you each brought into the marriage, the standard of living you and your spouse maintained, you and your spouse’s earning capacity, and your economic circumstances at the time of property distribution.

3. You Can Come Up With A Different Division As Long As It’s Fair

Regardless of whether your state is a community property state or an equitable distribution state, you can make an agreement with your spouse as to the division of your pension that differs from those standards. As long as both parties are in full agreement, it will be approved.

An easy example of this is if both you and your spouse have pensions or other retirement assets. If they are similar in size, you can agree to each keep your own accounts, with no rights to the other’s, instead of arguing over what portion of each you have access to. Working with an experienced divorce attorney will help you understand the options.

4. Your Plan Needs To Vest

The money in your pension plan does not belong to you until it vests – usually by you working a certain number of years or reaching a certain age. Because your pension will likely not vest until years after your divorce, and only when these qualifying events happen, your spouse is not likely to see their portion of pension money for years after an agreement is made.

5. You Need A QDRO (or other necessary order)

In order for the pension to be divided, a qualified domestic relations order (QDRO) must be processed by your pension plan administrator. The QDRO is a court order issued in the divorce that gives the non-employee spouse (the alternate payee) a right to your (the participant’s) retirement benefits.

Once your plan administrator receives the QDRO from the court and the plan has vested, it can still take several months for the plan administrator to process the documents and start paying your ex-spouse.

A QDRO is the most common order requested, but it depends on what pension type you have. For example, federal pensions will require a Court Order Acceptable for Processing (COAP). The purpose of these orders are the same regardless of what they are called.

6. Pensions Are Not the Same as Defined Contribution Plans (Such as 401(k)s)

Distribution at the time of retirement works differently for benefit plans (such as pensions) than it does for defined contribution plans (such as 401(k)s). If your spouse was granted 50% of your defined contribution plan, the QDRO for that property would direct that amount to be released at the time of your divorce into an IRA established in your ex-spouse’s name. There is no need to wait until you retire for them to receive their portion of the marital property.

Pension (and other defined benefit plan) payments, on the other hand, are a monthly benefit with the final amount in your pension unknown until you actually retire. The QDRO for pension benefits will detail specifically how the funds are to be distributed when you start getting paid. It will detail how much of the pension is marital property and the equitable distribution amount applicable to your case (decided either by an agreement with your ex-spouse or by the laws of the state and a judge’s ruling). If your ex-spouse qualifies for direct payment, then the plan administrator is responsible for ensuring that they receive their portion of the payments directly, otherwise, your ex-spouse will need to receive the payments from you.

7. Alternate Agreements Are Possible

To avoid owing your spouse money after your pension vests, as well as avoid the hassle of sending a QDRO to your plan, you and your spouse can agree on an alternate way of compensation for the benefits they are owed from the marital property portion of the pension. For instance, rather than split your pension 50/50 and a jointly owned home 50/50, you could agree to keep 100% of your pension and have your spouse keep 100% of the home if they are relatively equal in value.

You don’t have to figure out divorce and pension payout on your own

A qualified and experienced divorce attorney will help you navigate the ins and outs of a pension payout, and how to make the best decisions for your future.

Contact us today to schedule a consultation.

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