Common Issues in Dividing a Retirement Plan

The Basics of Texas Marital Property Law and Retirement

Dividing retirement accounts in a divorce can be complicated. If you want to protect your retirement or believe you are entitled to some of your spouse’s plan, understanding the details of your case and how the law handles questions of ownership is essential. Texas is a community property state. This means that all property divided in a divorce is presumed to fall under the characterization of ‘community property.’ However, some assets may still be categorized as ‘separate property.’ In the context of retirement assets, the value of accounts acquired before the marriage is generally separate property, and the additional value obtained during the marriage is usually community property. These situations may seem straightforward, but as many people know, when money is involved, simple issues can become complex pretty quickly.

Non-Qualifying Plans

If you or your spouse has a retirement plan that does not qualify under IRC and ERISA, you should gather some information regarding the specifics of your plan as soon as possible in your divorce. Many non-qualifying plans won’t allow you to divide the benefits. This can be great news for the spouse who has the retirement plan, but not great news for the spouse who does not have their name on the plan but they need some (or all) of those benefits. While your divorce is still pending, you can apply for other community assets while the case is still pending. If you would like professional guidance with this type of retirement plan, be sure to contact an experienced family law attorney.

Immediate Withdrawal of Retirement Funds

The spouse that is not the payee of a defined contribution plan will qualify if he or she uses a QDRO; he/she would be entitled to some benefits from the plan. Once the plan processes the QDRO, it awards a lump sum payment. This process usually takes about 60 to 90 days to complete. Keep this in mind. It is a common misconception that these benefits are received or distributed immediately. If you were planning on using those funds for specific purposes, you should explore alternative options for money until the process is completed. Some plans refuse to pay a lump sum; in others, the plan will immediately award a lump sum amount. Instead, the employee must be retired or terminated retirement before the plan will distribute the benefits. Just as with defined contribution plans, cash balance defined plans don’t always result in the immediate lump sum award to a spouse in a divorce. While some plans allow lump sum distribution of benefits, some plans allow it only when the employee retires or stops working at the company, and some plans don’t allow it at all.

Traditional Defined Benefit Plans

The wording in a decree can greatly affect when a spouse receives benefits from their spouse’s traditional defined benefit plan in divorce so it is vital that you have experienced attorneys draft the Final Divorce Decree with great care and precision. This mostly depends on shared and separate interest.

In the case of shared interest, an alternative payee will get the benefit when the participant gets theirs. The participant can also control the benefit.
If separate interest exists, the alternative payee can get the benefit at any time.

Hybrid Plans

Lump sum benefits don’t apply to local and state government hybrid plans for alternative payee since a lump sum benefit can lead to valuation issues, payment form issues, and/or commencement issues. This can in turn cause a problem for the alternative payee.

Protecting Yourself

Although most believe you will only walk away with half of your retirement funds after divorce, different retirement plans can have drastically different impacts on both parties. The first step is identifying all types of retirement plans that you may have in your name and identifying your spouse’s type of plan(s). Then, you need to determine the specifics of these plans and how they will apply to you and your spouse. It is important for you to hire a lawyer with experience in high-asset divorces to protect yourself and your retirement funds. Contact our team today to discuss your case.