How Are Retirement Accounts Split During Divorce? | Indiana Asset Division Lawyer

In many family law cases, retirement assets may constitute a large portion, if not the largest portion, of the marital estate.  Retirement accounts can come in a variety of forms and the division of these assets can be complicated. The following article explains the types of things that we look for in evaluating these issues.

1. What type of retirement accounts are affected?

Private Employment Related Retirement Accounts

Private employers may offer defined contribution benefits, such as 401ks.  (These types of plans may also include accounts with different names such as SIMPLE, SEP, or Profit-Sharing plans).  These account benefits have a set value as of a specific point in time, and are typically funded primarily by the employee, but the employer may contribute as well.

When Were the Contributions Made?

In Indiana, the most critical date for asset valuation is usually the filing date, but the court can look at the filing date or the date the case is finally resolved. Any contributions made after the initial filing date, however, belong to the person who is making these post-filing contributions.

Are There Any Loans?

In some cases, an employee can take out a loan against their 401(k) and it is important to understand whether the value on a statement includes the loan or not.  If a spouse decided to cash out a portion of their 401K account in the same year as the divorce is filed, the tax consequences can be significant, including potentially a 10% penalty and treating the entire distribution as an income producing event. The parties may have to carefully consider whether they file jointly or not for that calendar year depending upon who cashed out the retirement and for what reason.

What Is a Pension and How Is It Split During Divorce?

Some private employers still have defined benefit plans, such as pensions, especially where there is a union. Pension benefits, unlike 401(k) benefits, provide a set monthly amount for the life of the beneficiary. In the case of divorce, the pension can usually be split.

Many employees are upset when they find out that their spouse is entitled to a portion of the pension benefits because there is no guarantee that the pension will be in existence years in the future. So long as the benefits are vested (as discussed below), these are marital assets subject to division.

Typically, the company that manages the retirement account will break up the pension benefit into two accounts – one for the employee’s spouse and one for the employee. The retirement company then sends each party a monthly check once the pension benefits begin.

Sometimes one party may want to trade off pension benefits for other property items such as a house or another retirement account. Because the pension is a monthly benefit spread over a person’s lifetime, this trade-off generally requires an expert to calculate the present value of a pension to determine how it compares to the value of the household equity or the 401(k). We have retained experts in the past to do this and sometimes a pension value can be substantially more than the spouse anticipated.

Some executives may also be entitled to deferred compensation benefits which can be substantial. It is important to request verification of any employment benefits that an employee is entitled to in the future.

What Types of Retirement Accounts Are Offered by Public Employers?

Public employers may have a 401(k)-type benefit (which will probably be called something else such as a 403(b) plan), a pension, or perhaps both. In some cases, one spouse is not aware that the other spouse is entitled to pension benefits.

Unlike private employers, a public employee may not have to honor a court order dividing these benefits.  This can cause a lot of problems because the employee spouse will be receiving all of the monthly pension benefit and would be expected to then send a portion of the pension benefit to the spouse. In these situations, however, the taxes on the benefit are being paid by the employee spouse and not by the divorced spouse. Usually there needs to be some adjustment made to the benefit or an agreement that the divorced spouse is entitled to their percentage of the benefit after taxes have been paid.

What Are the Different Types of Personal Retirement Accounts?

In some cases, the parties have converted their 401(k) benefits to an individual retirement account (IRA) as a result of leaving their employer or one of the parties set up an IRA because an employer may not offer a retirement account option. These accounts have a set value and are relatively easy to divide.

Sometimes the parties may have a Roth IRA as well. A Roth IRA is set up with after tax dollars. Only the gains on the money are subject to tax in the future. By contrast, a liquidation of an IRA is subject to tax on the entire benefit which is distributed.

If a spouse has the choice between receiving a Roth IRA, a 401(k), or an IRA benefit, it is probably best to receive the Roth IRA if the dollar amounts are similar.  (This is meant to be a general discussion of tax consequences. We often work hand-in-hand with tax professionals to make sure that our clients understand the tax consequences of a particular distribution).

2. How Can Retirement Accounts Be Divided in Indiana?

What is Vesting?

To be a divisible marital asset, the retirement account has to be vested as of the filing date. Vested generally means that the employee is entitled to the benefit and cannot lose that benefit even though he or she may not receive it for a number of years.

401(k) type benefits generally vest immediately. Pension benefits may require a minimum number of years of employment before the employee is entitled to any pension benefits.  Vesting may also be determined by looking at the person’s years of service plus the person’s age.  If there is any question about vesting, it is critical to reach out to the employer to verify what the specific terms of their retirement plan are.

I recently had a case where the client had worked with the employer for a number of years and thought he was entitled to pension benefits but he actually did not vest until a few months after the divorce had been filed. As the account had not been vested as of the filing date, the pension was not a marital asset.

Can I Keep My Retirement Account Proceeds If the Account Was Created Before My Marriage?

We often have cases where a person has been contributing to their retirement for number of years and some of those years were before the marriage. The ability to carve out premarital retirement from the marital estate depends heavily on the nature of the benefit and what information is available on the premarital asset.

Dividing Pension Benefits

Pension benefits are often divided based upon the marital portion of the pension. If an employer has 20 years of service and 10 of those occurred during the marriage, often a couple will agree to equally divide the marital portion of the pension (10 years) and the employee would keep the rest.  This makes sense for pensions because the employee will receive a set monthly benefit when they retire which is not tied to specific monetary contributions.

Dividing 401(k) Benefits

401(k) benefits are more complicated because sometimes the data is simply not available to ascertain what the value of the 401(k) was on the date of marriage. Over the last 20 years there’s been a huge consolidation of companies who handle these accounts and some of the documents simply do not exist anymore. The other complication is that generally premarital appreciation of a premarital asset is still considered marital property in Indiana.

As a result, even if it was clear that a spouse had $50,000 of premarital 401(k) funds as of the marriage date any appreciation flowing from that contribution would still be considered marital property.

It is generally difficult to simply use a pension-type ratio for a 401(k) because the value is tied to specific contributions and the performance of the stock market.  Most employees contribute more to their 401(k) as they get older and are also making more money so that any employer match is also higher, which is another reason why it may not make sense to divide a 401(k) based upon the years of marriage.

Do Indiana Courts Consider Years That a Couple Cohabitated While Unmarried When Dividing Assets?

Many people don’t realize that the court also has the discretion to include years that the parties have cohabitated in dividing assets. I’ve had a few cases where the parties’ marriage is actually less time than the amount of time they had been living together prior to the marriage.  If a court is likely to include the years that the parties were living together, then the division of assets may be very different.

What is a Qualified Domestic Relations Order (QDRO)?

The divorce decree may spell out how retirements accounts are to be divided, but the decree probably will not actually get the transfer done.  In most cases, 401(k) and pension accounts are divided by what is called a “qualified domestic relations order” (or QDRO). A QDRO is an order which is generally entered after the divorce decree has been signed by the court. This order tells the employer how the retirement accounts are to be divided.

Almost all major employers have specific QDRO forms that they insist upon using. These forms may outline a number of different options on when benefits are received, how benefits are received, and what types of benefits can be received.  The QDRO should tell the employer the effective date of the transfer so that the employer knows when to value the account. Generally, that would be the filing date or the date of the agreement.

Many companies will allow IRA transfers without the necessity of a QDRO. The company may accept a certified copy of the decree to authorize the division of these accounts.

How Long Does It Take to Divide a Retirement Account After a Divorce?

The actual division of the account may take months depending on how quickly the retirement account processes the order. The nonemployee spouse generally will have the option to keep the retirement funds within the 401(k) or roll them over to an IRA.  So long as the account stays in the 401(k) or is rolled to an IRA, the order dividing these accounts does not amount to a taxable distribution.

Call Today to Schedule a Consultation with an Experienced Indiana Asset Division Attorney.

The division of retirement assets is extremely technical and requires the assistance of an attorney in almost every case. I had one client in the past who mistakenly believed that he was to simply to cut his ex-wife a check out of his 401(k) and then she would deal with the tax consequences. That was treated as a taxable distribution to him and the net amount received by the ex-wife was a lot less than what the parties had agreed to because of the taxes which created a number of problems.

As an experienced Indiana divorce attorney, I help individuals navigate through the divorce and asset division process, helping to avoid common pitfalls and protect the best interests of my clients. Call my office today to schedule a consultation to learn more about these matters.

Pay Bill Pay Retainer