Dividing Pensions and Retirement Assets

Under California’s community property guidelines, the Family Law courts are to divide all assets and debts of the marriage equally and equitably. The value of the marital estate is generally set either by the parties, in a Marital Settlement Agreement (“MSA”), or as close to the date of trial as possible in accordance with Family Code § 2552. Even when the parties have entered into a Pre-Marital Agreement and/or a Marital Settlement Agreement, the Family Law court retains authority to oversee the division of assets and debts. (Family Code §§ 2010.)

Thanks to the Employee Retirement Income Security Act of 1974, (“E.R.I.S.A.”), and its subsequent revisions, the Family Law court’s jurisdiction, except as specifically limited by federal and state employment laws, covers pension and retirement plans. Thus, an easy way to review your marriage’s pension and retirement plans/accounts is to first look at whether they include government sponsored pensions. If so, there are a number of provisions which must be honored to result in an effective division of the marital estate. This area is beyond the scope of this article. However, where non-government pensions and retirement plans are assets to be divided, the process is relatively simple.

As stated above, assets get split in half, unless it makes more sense to award one to one spouse and another of equal value to the other spouse. Where the asset must be split, two questions arise:

1) Is the asset and account or plan that can be specifically valued as of a given date, and easily divided by a written form (usually provided by the financial institution) or a letter from the parties (notarized)? Here, all that need be done is execute the form or letter, and have the payment deposited in a tax protected retirement account. Current law and social norms result in most non-pension accounts and plans being readily divisible, as described above.

2) Is the account part of a Defined Benefit Plan (“pension”)? In this situation, which frequently occurs with large and well-established employers, then the retirement benefits may include a variety of plans, accounts, and divisible benefits. These may consist of the pension, tax-qualified/matching funds accounts, tax-qualified deferred compensation accounts, and health care benefits extensions.

Pensions (as defined above) and extended health care benefits usually must be “joined” (known as a motion or petition for joinder) to the Family Law case. Also, terms of the division of the pension must be specifically agreed to or divided by the court. These are embodied in a separate order, known as a Qualified Domestic Relations Order (“QDRO”). The judgment or MSA is not sufficient to bind a pension plan administrator to divide the plan’s assets and benefits according to the terms of those pleadings. E.R.I.S.A. requires that pension plans adhere to the federal regulation to maintain their tax-qualification. A QDRO is the instrument by which the pension plans assures that all of the E.R.I.S.A. mandated protections appear in the order splitting its benefits. In years past it was not uncommon for large employers to require a QDRO to divide the pension benefits, 401-K type I.R.A. and deferred compensation accounts they offered their employees. However, the modern trend is to allow non-pension retirement accounts and assets to be less formally divided.

One other situation that should receive attention is when the family has executed a living or revocable trust (sometimes called intervivos trust). Without going into the detail necessary to outline how these should be structured prior to dissolution of marriage or adjusted after separation, it is important to know that a few actions must be undertaken to achieve the proper division of any asset or property held under title of the family’s living trust. If you have not already done so, it is critical that title to any asset or property the family wants included under the protection of living trust have title transferred to the trust. Then, after the spouses agree or court ordered the trust asset(s) divided, the parties will need to have those assets, or their shares of them, transferred back into their own names.

In closing, allocating pension and retirement assets in a dissolution of marriage is an area of Family Law not, on the whole, terribly complex. However, it does have a number of formalities that must be observed to accomplish a proper division, and prevent the additional (and usually greater) expense of correcting the mistakes from mishandling them. As always, seek the advice of competent legal counsel when planning or even contemplating a major change in your family status. An hour or two consultation can save tens of thousands of dollars in avoidable expense.