Deferred compensation refers to
pension plans, 401K plans, IRAs and other retirement assets.
Such plans are divisible as part of a property settlement in
divorce regardless of which party is named on the plan. How they
are divided depends on the value and nature of the asset.
Perhaps one of the worst scenarios in a divorce is when
retirement assets are transferred to a former spouse but the
original owner is liable for liable for the taxes, including
penalties for early withdrawal.
Types of Retirement Assets: There are three main
kinds of deferred compensation plans.
- There are "Savings plans",
such as IRAs, 401(k) Plans, ESOPs, Thrift Savings Plans.
- There are also "defined
contribution" plans. A defined contribution plan is one
in which the value of the plan is determined in part by the
amount of contributions made into the plan. The money
contributed may be invested and grow.
- There are also "defined
benefit" plans. With a defined benefit plan, an
employee is provided a monthly payment starting at
retirement age and ending at the end of his/her lifetime.
Dividing Savings Plans: Savings plans such
as an IRA are considered "cash" plans since they may be
liquidated before retirement age. They are divisible as part of
a divorce. However, before any division may occur, a custodian
of the account must receive and review a certified copy of the
court order dividing the plan. Additionally, the spouse
receiving a portion of the plan must fill out documents relating
to the manner of payout. IRA proceeds may be cashed out and paid
directly to the receiving spouse or they may be
"rolled" over into a new IRA in the name of the
receiving spouse. However, the tax consequences related to
cashing out the plan may reduce the plan proceeds by more than
thirty percent (30%) for taxes and early withdrawal penalties.
Valuing and Dividing Defined Contribution Plans.
The valuation of a defined contribution plan can be determined
by multiplying the account balance by the percentage of vesting.
This is a relatively simple way to value the plan and determine
marital value. Generally, such plans may be divided currently
with each party receiving one half of the current vested value.
Valuing and Dividing Defined Benefit Plans. With
a Defined Benefit Plan, generally the participant's benefits
cannot be liquidated prior to retirement age and the
non-participant spouse may receive a retirement plan in her name
representing her marital interest in the participant's plan.
This plan is generally subject to the same terms and conditions
of the original plan. Often, the Participant may choose a
payment method from several options. The chosen method will
affect the amount or timing of the payments to both the
participant and any receiving spouse. This may mean that
retirement benefits are received when the original participant
decides to retire, not when the recipient spouse retires.
A defined Benefit plan may be
divided in one of two ways.
- Cashing Out/Present
Value Calculation. First, a recipient spouse may
elect to receive money effectively cashing out his/her
interest in the plan. To cash out, a present value of the
plan proceeds must be determine. "Present Value" is the
current value of a future benefit. In simple terms, a dollar
that you receive today is more valuable than a dollar you
receive next week since you may invest the dollar or deposit
the dollar and accrue interest. Therefore, retirement
benefits that are received at retirement age would have a
lower value if paid in a lump sum currently. Often, a
calculation or of present value requires an actuary or
- Division of Future
Benefit. Rather than using a present-day cash
value, a defined benefit plan may be divided by dividing the
future stream of income. This is accomplished by drafting a
Qualified Domestic Relations Order (QDRO). This is a court
order which instructs a pension plan to pay an Alternate
Payee (or former spouse) a portion of retirement benefits
accrued by a Participant due to an equitable distribution
agreement in a divorce. With this method, the court retains
jurisdiction until the benefits are paid.
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