Worried About Your Retirement Assets And Divorce?
For many of our clients, how retirement accounts, deferred compensation plans and other investments will be divided in divorce are absolutely critical concerns. Today, 401(k) accounts, IRAs, military and other government pension plans, profit-sharing accounts, stock options and annuities are often the most valuable of all marital assets. Contact one of our Rockville retirement assets attorneys for advice on any of the following issues as they relate to your particular circumstances:
NOTICE: None of these questions and answers constitute legal
advice. To obtain legal advice, consult with an attorney. This is
especially important in divorce and family law matters, in which
outcomes are often peculiar to the particular facts and
circumstances of the case.
Q. What types of retirement accounts are at issue in
A. Any pension, retirement, profit sharing, or deferred
compensation plan or account is at issue. Retirement assets
include IRA, 401(k), 403(b), TSP, profit sharing, money purchase,
pension, stock option, annuity, and any other deferred
compensation accounts or plans; military, FERS, CSRS, state,
county, municipal, union, and private defined benefit plans and
defined contribution plans; and survivor benefits.
Q. In a Maryland divorce, what retirement assets are
A. Any pension, retirement, profit sharing, or deferred
compensation plan or account acquired during marriage is
marital property. So, for example, the right to receive
retirement benefits under a private or public employee pension
plan, whether or not vested, matured, or contributory, is
property which, if acquired during marriage, constitutes marital
Q. In a Maryland divorce, what retirement assets are
A. Any pension, retirement, profit sharing, or deferred
compensation plan or account acquired before marriage, by
inheritance or gift from a third party, excluded by valid
agreement, or traceable to any of these sources is nonmarital
property. So, for example, payments made toward a 401(k)
prior to marriage are nonmarital property. So, too, the increase
in 401(k)'s value during marriage, which is "directly traceable" to
the portion acquired prior to marriage is nonmarital property.
Q. What if only one spouse contributed to retirement
benefits acquired during marriage?
A. When the right to receive retirement benefits is acquired
during marriage, it is marital property subject to equitable
Q. Are employer matching contributions to an employee
retirement asset treated differently than employee
Q. In a Maryland divorce proceeding, is transfer or
distribution of retirement assets required?
A. No. The Maryland statute governing disposition of marital
property gives the court discretion to transfer interests in
retirement, pension and deferred compensation plans in divorce
proceedings, but does not require the court to do so.
The court has much discretion in determining the best way to
allocate marital assets between parties. Whether to award
retirement funds is but one of its options. If the court decides
to award part of a retirement plan or similar account, it has
considerable flexibility in determining how and when payments
will be received. However, flexibility and discretion do not
equate to a mandate that every divorce litigant with a
retirement account must share it with an ex-spouse.
The retirement account or pension plan is often, next to the
family home, a divorcing party's largest asset, so it may become
necessary for the court to consider dividing it. However, for
example, where the retirement account represents only a
fraction of the total marital property, some of the retirement
asset was acquired before marriage, and other funds are
available for a monetary award, the court may decide to let the
retirement asset remain untouched.
Q. What methods are used to determine the value of
A. For purposes of divorce in Maryland, a court has broad
discretion in evaluating pensions and retirement benefits. In a
Maryland divorce action, pension or retirement benefits can be
valued (1) as equal to an employee's contributions to the
pension plus accrued interest or market experience thereon, (2)
as the "present value" of future benefits expected to be
received by the employee after retirement, or (3) through
determination of a percentage to be paid to the nonemployee
spouse from any future retirement payments received by an
employee spouse, payable "as, if, and when" received. The
method used for valuing a spouse's pension or retirement
benefits in dividing marital property upon divorce will depend
upon the facts and circumstances of the particular case.
Q. What is the "present value" method?
A. Under this approach, benefits payable in the future have to
be discounted for interest earned in the future, for mortality,
and for vesting (if not fully vested at the time of divorce). The
benefits then have to be calculated with respect to the
employee-spouse's life expectancy as a retiree. This calculation
involves considerable uncertainty, and the amount yielded
changes as different assumptions are used with respect to
mortality, job turnover and other factors. It has been
recognized that this kind of calculation can be very difficult and
that, where it becomes too speculative, the trial court should
use a different method of valuation.
Q. When are payments made to the nonemployee spouse
under the "contributions plus" method or the "present
A. Under either the "contributions plus" method or the "present
value" method, the court has discretion to order payment to
the nonemployee spouse in either a lump sum or in
installments, depending primarily on other assets and relative
financial positions of the parties.
Q. Are there circumstances when the court does not
determine the value of retirement assets?
A. The court need not determine the value of a pension,
retirement, profit sharing or deferred compensation plan,
unless a party in a divorce proceeding has given notice that the
party objects to a distribution of retirement benefits on an "if,
as, and when" basis. If timely notice is not given, any objection
to a distribution on an "if, as, and when" basis shall be deemed
to be waived unless good cause is shown.
Q. What is an "if, as, and when" award, and how does it
A. The third method, which has been referred to as the "if, as,
and when" method, recognizes that the value of a pension at
the time of divorce cannot be ascertained with certainty until the
employee spouse retires.
This third method, which has been used widely, uses a formula
for computing the nonemployee spouse's share of any future
payments the employee spouse receives under the plan,
payable to the nonemployee spouse as, if, and when paid to
the employee spouse. Under this approach, of course, it is
unnecessary to determine the value of the pension at all. The
court need to do no more than just state the formula to be used to
determine the percentage to which the nonemployee spouse
will be entitled.
Q. What formula is used in an "if, as and when" award?
A. The formula used in an "if, as and when" award of pension
benefits, referred to as the Bangs formula, calculates the value
of the pension to which the nonemployee spouse is entitled as
a percentage, usually 50 percent, multiplied by a fraction, the
numerator of which is the number of months and years of
employment during the marriage, and the denominator of which
is the total number of months and years of employment at the
time of retirement.
Q. Why isn't the nonemployee spouse's share frozen at
the time of divorce?
A. Maryland's appellate courts have disapproved of attempts to
freeze the nonemployee spouse's share of the employee
spouse's pension to its then current fixed value at the time of
divorce. They have observed that an employee spouse's
increases in salary after divorce would be based in part on work
performance during the marriage. Moreover, any future
adjustments by management might well relate to the length of
the employee spouse's total service, including the period of the
Q. Does it matter whether alimony is awarded to either
A. The court may transfer ownership of an interest in a pension,
retirement, profit sharing or deferred compensation plan, from
one party to either or both parties as an adjustment of the
equities and rights of the parties concerning marital property,
whether or not alimony is awarded.
Q. Can an "as, if, and when" award be made even if one
party wants a lump sum?
A. Yes. Awarding a nonemployee spouse a portion of an
employee spouse's pension benefits on an "as, if, and when"
basis, rather than as a lump sum, is permissible, despite the
employee spouse's preference for a lump sum award. Likewise,
awarding a nonemployee spouse a portion of an employee
spouse's pension benefits on an "as, if, and when" basis, rather
than as a lump sum, is permissible, despite the nonemployee
spouse's preference for a lump sum award.
Q. How are survivor benefits treated?
A. Survivor benefits attached to a pension are property
separate and apart from the pension itself. Although survivor
benefits are like a pension, they have been treated as marital or
nonmarital property in their own right, depending on when and
how the survivor benefits were acquired.
A spouse seeking to recover an interest in the survivor benefit
attached to the other spouse's pension must request the
survivor benefit in addition to any request for the pension
Q. Can a divorced party reduce a former spouse's share
of retirement benefits by electing survivor benefits for
A. A divorced party with a retirement cannot reduce a former
spouse's share of pension benefits by electing survivor benefits
for someone other than the ex-spouse. Although an employee
spouse is free to elect survivor benefits for someone other than
the nonemployee former spouse, the nonemployee spouse's
pension benefits should not be less than they would have been
if such an election had not been made.
Q. If a transfer or distribution of retirement assets takes
place in connection with a divorce proceeding, are income
A. Done properly, transfers between spouses incident to a
divorce or separation instrument are not taxable events for
either the transferor or the transferee. Consult a tax advisor
with experience in transfers incident to divorce for guidance on
how to transfer retirement assets properly.
Of course, previously tax-deferred income will be taxable to the
transferee spouse upon withdrawal from a retirement account.
However, under certain circumstances, the transferee spouse
may avoid withdrawal penalties. Consult a tax advisor for
guidance on how to do so.
Q. What is a Qualified Domestic Relations Order or QDRO?
A. A Qualified Domestic Relations Order, or QDRO (pronounced
"quadro"), is one type of order that is issued by a court to
transfer retirement assets. Although the term has a technical
meaning, referring to employer-sponsored plans subject to
ERISA, it has come to be used to refer to just about any order
to transfer retirement assets. A QDRO must be approved by
the administrator of the retirement plan as well as the court
before it is carried out.
Q. When is a QDRO needed to transfer or distribute
A. Pension plan benefits payable to an employee spouse under
an ERISA plan can be redirected to an alternate payee non
employee spouse only through the mechanism of a Qualified
Domestic Relations Order or QDRO. Absent such a qualified
order, not only will the pension plan administrator refuse to
implement the court's decision, but there is at least a
reasonable argument that a nonqualified order may be invalid
even as between the parties.
Q. What will prevent a retirement order from being
A. An order will not be "qualified" if it grants any type or form of
benefit, or any option, not otherwise provided under the plan,
or results in a plan having to pay increased benefits.
Q. In a QDRO, what do the terms "participant" and
"alternate payee" mean?
A. These are terms used in QDROs and other retirement
orders. "Participant" refers to the spouse who is an employee
or former employee of the plan sponsor, and "alternate payee"
refers to a nonemployee spouse.
Under ERISA, an alternate payee is "any spouse, former
spouse, child or other dependent of a participant who is
recognized by a domestic relations order as having a right to
receive all, or a portion of, the benefits payable under the plan
with respect to such participant." An alternate payee, under a
QDRO, is treated as a plan beneficiary.
Q. How do pension or retirement assets get divided by a
QDRO in a divorce?
A. QDROs can and must be drafted to provide for differing
payment types depending upon the type of plan involved. One
type of payment is a "shared payment." A second type of
payment is a "separate interest."
Q. What is a "shared payment" and how does it work?
A. One type of payment available is a "shared payment,"
whereby the QDRO seeks to divide only actual payments made
with respect to the participant under the plan. Under a shared
payment approach, only the participant's stream of income is
divided and the alternate payee is not actually given a portion of
the actual retirement benefit. Therefore, the alternate payee's
right to receive payment is dependent upon the participant's
receipt of payments under the plan and he or she will not
receive a distribution unless, and until, the participant is in pay
status. Accordingly, QDROs providing for shared payments are
typically entered in cases where the participant is already
receiving payments under the plan.
Q. What is a "separate interest" payment and how does it
A. Under a "separate interest" QDRO, the participant's actual
retirement benefit is divided, and the alternate payee is
permitted to receive a portion of the retirement benefit to be
paid at a time and in a form different from that chosen by the
participant. A separate interest QDRO is often preferred where
the order seeks to divide a pension as part of the marital
property as opposed to providing for support payments. A
separate interest award is permitted by Maryland law whether
the participant spouse's interest in the plan is vested or
unvested at the time of divorce.
Q. What happens when one spouse puts nonmarital funds
into an IRA of the other spouse?
A. One spouse's creation of an individual retirement account or
IRA solely in the other spouse's name but primarily with the
contributor spouse's nonmarital funds may indicate the
contributor spouse's intent to make a gift to the recipient
spouse, and to relinquish equitable interest in the funds. The
contributor spouse's conduct may support classification of the
IRA as the recipient spouse's nonmarital property upon divorce.
Q. After divorce, can one spouse collect Social Security
benefits based on the other's record?
A. If a divorce occurs after at least 10 years of marriage, you
can collect retirement benefits based on your former spouse's
Social Security earnings record if you are at least age 62 and if
your former spouse is entitled to or receiving benefits. If you
remarry, you generally cannot collect benefits on your former
spouse's earnings record unless your later marriage ends
(whether by death, divorce or annulment). Get more
information at www.socialsecurity.gov.
Q. How does divorce and remarriage affect Social Security
A. If your divorced spouse dies, you can receive benefits as a
widow/widower if the marriage lasted 10 years or more. Benefits
paid to a surviving divorced spouse who is 60 or older will not
affect the benefit rates for other survivors receiving benefits.
In general, you cannot receive survivors benefits if you remarry
before the age of 60 unless the later marriage ends, whether by
death, divorce, or annulment.
If you remarry after age 60 (50 if disabled), you can still collect
benefits on your former spouse's record. When you reach age
62 or older, you may get retirement benefit on the record of
your new spouse if they are higher. Your remarriage would have
no effect on the benefits being paid to your children.
Montgomery County Retirement And Divorce Attorneys Striving To Protect Your Financial Interests, Wherever You Live In Maryland
You can count on us at Meiselman & Helfant, LLC, to thoroughly assess your situation and devise a clear strategy based on relevant laws and your goals. We have excellent relationships with other experts in valuation and asset analysis as well. To schedule a consultation with a lawyer, please call or email us today.