It’s common to assume your spouse is automatically entitled to “half” of your pension or other retirement assets if you divorce. This is really not accurate, however.
First of all, in New Jersey, marital assets including retirement assets, are distributed “equitably” upon divorce, which is not necessarily 50-50.
This means that distribution to your spouse is based upon consideration of 15 or so statutory factors, which include among others, the length of the marriage; the ages and health of the parties, the economic circumstances of each party; and the income and earning capacity of each spouse.
So how much of your retirement is your spouse “entitled” to?
Like any marital asset, pensions and other retirement plans acquired during the marriage by either spouse are typically divided upon divorce.
Unlike 401(k) plans, “pensions” typically are “defined benefit” plans funded solely by employers. This means the plans provide for future lifetime monthly benefits to you.
Pensions are most often associated with state and local government employment. There is no account balance and you generally cannot take loans against a pension.
On the other hand, retirement assets such as 401(k) plans, 403(b) plans, employee stock ownership plans, and profit-sharing plans are generally valued as of the account statement closest to the date on which the divorce complaint was filed.
How do you determine the value of your retirement asset to be divided?
The “marital value” is the value of your retirement asset in which your spouse would share. The “marital value” is typically the value that runs from the date of marriage to the date on which a divorce complaint was filed with the Court, or other mutually agreed upon date the marriage is deemed “terminated” (often called the “marriage termination date.”)
Therefore, any portion of a pension or retirement plan that predates the marriage is typically exempt from being divided in divorce.
To find out the value of your pension, obtain a “present value” of the marital portion of your pension. The “present value” is the marital value of your future benefit in today’s dollars. A qualified actuary or accountant can calculate the present marital value of your pension for a relatively nominal fee.
401(k) and similar plans
The value of account-type retirement plans to be divided, however, is generally the value of the account on or close to the date the divorce complaint was filed with the court or other agreed upon marriage termination date.
How is the marital value of your retirement asset divided with your spouse?
There are generally two options for dividing the marital value of your pension or retirement account:
1. Present value offset.
Agree with your spouse to “offset” the present value of your spouse’s estimated share of your pension or retirement account with another marital asset of comparable value.
This would enable you to keep your pension provided your spouse receives another marital asset of comparable value.
For example, if the marital value of your pension or retirement account is calculated as $200,000, your attorney might advise in your case that your spouse’s share is worth $100,000. Accordingly, you might then agree for your spouse to receive another marital asset worth $100,000 and you keep your pension.
2. Division by Qualified Domestic Relations Order.
A Qualified Domestic Relations Order, commonly called a “QDRO”, is a separate court order prepared by a qualified professional, typically an actuary. The QDRO is required by your retirement plan administrator to pay your spouse’s share of your retirement asset directly to your spouse after the divorce.
For a pension plan, your spouse typically receives his or her share when you retire.
For a 401(k) or another account-type plan, your spouse would typically receive his or her share according to the terms of your particular plan. Some plans allow for a single lump sum payment while others do not. Your attorney would advise you as to which method of dividing your retirement plan upon divorce would work best for you.
For more information about how to divide your pension or retirement plans in divorce or for a personalized consultation, please click here.