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Pensions and 401(k) Plans in Divorce

In most states pensions and 401(k) plans are considered property of both parties, if they were earned or contributed to during the marriage. Children may be entitled to a percentage as well. The same principles which apply to property and money acquired during a marriage apply to pension and 401(k) plans.

The assumption is that, although one party may have been the sole bread-winner, the other spouse contributed in non-monetary ways, such as domestic duties, and is therefore entitled to a share of the benefits. When one spouse chooses not to work, in order to run the household, they give up the opportunity to earn money to contribute to their own future financial security.

Even though over half of marriages end in divorce, no one gets married with the expectation of divorce. Believing that they will grow old together, married couples rarely provide for separate futures. Without a right to pensions, 401(k)’s and other retirement benefits, there would be an overwhelming number of destitute, divorced senior citizens.

Early liquidation of pensions and 401k can result in a substantial loss and a tax burden, and some plans require contribution over a set amount of time. Liquidating is usually not a good way to achieve division of benefits.

Buy Out
One spouse may keep the plan and “buy out” the present day value of the plan, compensating by giving up other property or cash. It can be difficult to judge the long-term value involved, so it is best to work with your attorney to determine if this is a good option.

Dividing into two accounts
The preferred option is to divide the plan into two accounts. A federal law called the Employee Retirement Income Security Act of 1974 (ERISA) governs the division of pensions and 401(k) plans and outlines the rules for handling this division in the event of divorce. ERISA requires that a Qualified Domestic Relations Order (QDRO) be provided to the pension administrator. This document is a court order that outlines the details of the division that the administrator must follow.

Division of pension and 401(k) plans can be a complicated and confusing process. Just like the rest of property division many factors can affect how the plans will be divided including the duration of the marriage and the overlap period of marriage with time of contribution to the plan. These matters should not be addressed without the help of an experienced divorce attorney.

If you are facing a divorce, contact an experienced divorce attorney today.

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