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What Happens to Pension Plans in a Divorce?

Posted by Furman & Zavatsky | Mar 29, 2018

Dividing Pensions Plans in a Divorce

Getting a divorce is a stressful event. However, while you're going through the difficulty of a divorce process, you still need to make wise financial decisions regarding the property division that you and your spouse have accumulated during your marriage. Typically, retirement savings are one most valuable assets you possess. Therefore, it's a critical issue in divorce proceedings, but it's also frequently complicated.

If you're planning a divorce and your spouse has an employer retirement plan such as a 401(k) retirement or pension plan, you have the legal right to a portion of the balance, assuming you don't have a prenuptial agreement preventing it. Likewise, this same legal right also applies the other way around, meaning your spouse is entitled to part of your employer retirement account value if you have one.

In Los Angeles divorce cases, one of the most common questions our divorce lawyers are asked involves situations where your spouse was the primary breadwinner. How can you protect your share of their retirement account? How can you stop your employer from paying out the benefits to your spouse, leaving you with almost nothing? Frequently, the answer is a Qualified Domestic Relations Order (QDRO). It can protect your interests as it's a court order judgment related to child support, alimony, or property rights that can instruct your spouse's pension plan on how to pay your share of plan benefits. A QDRO will protect you and guarantee what a marital settlement agreement does not.

Pension Plans  –  Largest Asset in a Divorce

As often as not, pension plans — whether Individual Retirement Accounts, 401(k) retirement plans, private company pensions, or government pensions – are among the largest, if not the largest, assets involved in a divorce case. The later in life the divorce occurs, the larger the pension plan is likely to be. And with divorce becoming increasingly common among older Americans – one in four divorces now involves couples over 50 – pension plans of considerable value also are increasingly at issue in divorce cases.

As stated above, what happens to pension plans in divorce is a complex area of law. If your Los Angeles divorce lawyer is not well-versed in the division of pension plans in divorce, you could find yourself severely short-changed. Further, tax issues abound, and a misstep by your lawyer with respect to those tax issues also could cost you dearly.

Under California divorce law, pension plans are subject to division just as any other kind of marital property the divorcing couple might have. While the assets of a pension or retirement plan are not available until retirement, those assets remain subject to division at the time of divorce, regardless of when the assets might become available for actual distribution.

How Much of a Pension Plan is Community Property?

California law considers all property acquired during the marriage to be community property. This includes pension plans. All community property is shared equally between the divorcing spouses. Thus, any part of a pension plan earned during the marriage is community property.

This includes defined-benefit plans, such as private employer pensions or government employee pensions, that pay a defined amount per month after retirement and defined contribution plans, such as IRAs or 401(k) plans. How the plans are divided can include such factors as how long the spouse worked for the pension-providing employer and how many of those years fall within the marriage term, compensation, age at retirement, and rate of return on pension investments.

For a spouse with a pension plan provided by that spouse's employer, if the spouse's term of employment falls entirely within the term of the marriage, the entire pension is community property. If not, the court must determine how much of the pension was earned outside of the marriage term as well as how much of the interest on the pension was earned outside of the marriage term. This can be a complex procedure that ultimately involves federal as well as state law.

How Do I Ensure My Spouse's Pension Plan is Divided in the Divorce Case?

In general, a pension plan must be treated almost as if it were a separate individual in a divorce case. To have the plan included in the case, the spouse that does not own the plan usually must file a motion to “join” the plan as a party to the divorce case. This is not always the case, but your Los Angeles divorce lawyer better know if your spouse's pension plan needs to be subject to a motion of joinder, or you could be left out in the cold. The exceptions are narrow, but they exist.

Once the pension plan is joined to the case, the assets of the plan cannot be distributed without a court order, thus protecting the rights of the spouse that is not the owner of the plan.  California Family Code beginning with Section 2060, governs how a pension plan is joined to a California divorce case.

As stated above, once joined, most pension plans can be divided only by using a Qualified Domestic Relations Order, or QDRO. This is a function of federal law, as most pension plans are subject to the Employment Retirement Income Security Act.  ERISA requires a QDRO to divide a pension plan governed under ERISA. Most retirement plans fall under ERISA governance, so a QDRO will generally be required. The QDRO provides instructions to the pension plan administrator as to how the plan should be divided.

State and local pension plans in California are not covered by ERISA but rather fall under the California Public Employees Retirement Law. The requirements for division orders are similar to QDRO's under ERISA, but not identical. Failing to comply with state requirements for California state and local pensions can leave you unable to receive pension benefits from your former spouse in a divorce.

The state of California maintains a website to give advice and guidance to people whose divorce case involves a pension plan. Still, the site repeatedly acknowledges that the division of pension plans in a divorce is so complex that legal representation likely is necessary.

If you are getting divorced in the Los Angeles area and your case involves pension benefits as potential community property, contact the Los Angeles divorce attorneys of Furman & Zavatsky at (818) 528-3471 or through our online contact form. We can help you through the complicated process of pension benefits allocation.

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Family law disputes have the potential to have a significant impact on your quality of life and overall happiness. As a result, it is critical for you to protect your rights to the fullest extent possible when involved in a dispute related to family law. The lawyers of Furman & Zavatsky have the skill and experience to resolve your case as favorably as possible and provide compassionate and understanding legal counsel and representation. We also offer flat fee legal services for divorce and family law issues.

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