A pension can sometimes be the most valuable asset in a marriage. If you’re lucky to have a pension, but you are unlucky enough to be filing for divorce, the question at the top of your mind would probably be about the fate of your pension. “Is my spouse entitled to a share of my pension checks?” Unfortunately, a pension is considered a marital asset/joint asset and therefore is subject to division during a divorce.
A pension falls in the same category as 401(k)s, IRAs, and 403(b)s. All these are considered joint assets. The rule of thumb is that anything earned during the marriage is regarded as a joint asset, while anything made before the marriage remains to be individual property.
The division of pensions following a divorce process isn’t always a cut-and-dry thing. One reason being, unless you’re actively receiving the pensions and you already know the exact payment amount and frequency, it can be tough to place an exact value on what the pension might be worth in the future. Again, this is sometimes not guaranteed since it depends on the employee spouse’s years of employment in that particular company.
Varies by state
Remember also that each state retirement system has its own rules relating to the division of state employees’ pension during divorce proceedings. While it is a marital asset, this doesn’t mean it will be divided 50/50. Equitable property distribution states divide marital property fairly (not equally). However, those that are community property states such as Arizona, California, Idaho, Nevada, Wisconsin, Texas, Washington, Alaska, Louisiana and New Mexico all divide marital property equally (50/50), including pensions.
If you are enrolled in a military or government pension, you may be under a different set of rules which dictate the division of assets. Similarly, if you and your spouse have a prenuptial agreement that protects your pension plan, then this means your pension is entirely yours.
Initially, the 1974 Employee Retirement Income Security Act (ERISA) existed to help protect voluntary pension holders. However, in 1984, the Retirement Equity Act was birthed and aimed at safeguarding spousal benefits concerning pensions.
For your spouse to access a certain ratio of your pension, he or she needs to specifically ask for the share at the point of divorce and not when you’ve already retired. This is actioned through a court order commonly called a qualified domestic relations order (QDRO) – which is pronounced as “kwad-dro.” This pension would be withdrawn at the time of divorce settlement and transferred into your spouse’s account; that’s if your spouse is entitled to half of your pension.
Types of pensions
There are two main types of pensions, namely: defined benefits plan and defined contribution plan.
A defined benefit plan is a pension where an employer agrees to pay a certain benefit to an employee based upon some conditions such as how long the employee has worked for the employer and how much this worker earns
A defined contribution plan is where an employer agrees to contribute to an employee’s plan annually. Such an example is a 401k where the employer and the worker might contribute to the account.
Power of bargaining
If you have a pension set up and you’re in the middle of a divorce, you don’t have to fork out half of it – not on the very onset at least. You may discover that you can haggle a bit. First, find out if your soon-to-be-ex has a retirement set up under their name. If it matches your own retirement in terms of value, it is incumbent upon the both of you if you just called it even.
Second, if your spouse’s retirement doesn’t match yours in value, consider other marital assets that you can offer instead of your state pension. The best option here could be real estate. So instead of splitting your retirement, you can offer up your former home or any other real estate asset with a comparable value.
Can a court divide a defined pension during a divorce?
Often in most divorce suits, neither spouse has started receiving the pension yet. So there’s really not a pot of money to divide – but just a promise to pay sometime in the future after retirement. If the pension is a defined benefit plan, the Court has the power to order the division of the retirement once it starts to be received.
Most likely, the pension will be taxed. A QDRO can then be filed, which then transfers pension benefits to the ex-spouse who was not the company’s worker. This document will prevent you from paying taxes on the transferred benefits.
The bottom line
In summary, divorce will affect your pension. Your ex-spouse is generally entitled to some of your pension following divorce. However, the amount your spouse will receive will depend on the state laws which govern pensions during divorce settlements.
What to do
- Know your pension plan in detail
- Hire an attorney with experience in pensions. You might also need a QDRO specialist
- Find out if your state is a community property distribution state or equitable distribution state
- Remember that military and government pensions have a different set of rules
- Not all pension plans are divided 50/50. Settlements depend on what was actually earned in the marriage
- Consider replacing your pension with another asset