Huntington Beach CA
Handling Retirement Accounts during a Divorce
Under the Family Code of California, community property is divided between the spouses 50/50. Retirement benefits are a form of employment compensation, like earnings. Thus, regardless of when the benefits are vested or matured, for pensions based on time of service as opposed to a point system fn-1, the benefits are community property, to the extent earned during marriage, up to date of separation. For example, if the Participant [spouse earning the pension] earns benefits under the plan for 240 months, and is married prior to separation during 160 of those months, 2/3 of the benefits are community property. The other spouse therefore has a right to 50% of that 2/3 = 1/3 of the pension benefits. When these rights are established through an appropriate order [see below], the other spouse is recognized by the pensions as an Alternate Payee.
If the Participant proposes to take all of the benefits of the pension, the first step is to determine its current value. For a defined contribution plan, e.g., an IRA or 401(k), the current value is easy to determine since it is reported to the account holder in monthly, quarterly, or annual statements. For a defined benefit plan, such as a corporate sponsored pension, unless the Participant is already in pay status, the current value needs to be determined by an expert known as an actuary, using an estimate of inflation from the present until the date that payments are to begin to be made, along with other factors. And, if the parties go to court, actuaries hired by each party may take contrary positions and testify to arrive at very different monetary figures, with the judge to decide. Thus, assigning the pension to one spouse creates problems of evaluation. If the value of the pension is large compared to other community property, agreement on equitable division of community assets becomes more difficult.
Another factor to be considered is how to take account of the risk that the retirement plan will not pay off, or not pay in full. In addition to the risk that the pension will fail to vest, bankruptcies by corporations in recent years have led to large losses in pension benefits. Fn-2. A federal agency, the Pension Benefit Guaranty Corporation [PBGC], is supposed to make up these losses, but is itself increasingly underfunded and able to pay only a fraction of the benefits earned in many cases. Fn-3. If the Participant is assigned the pension, he/she bears the entire risk that it will not pay off. It may be considered to be more equitable to share that risk.
Some employer sponsored plans, e.g., a simple IRA, SEP-IRA, SAR-SEP, can be divided by the Judgment of Dissolution or other regular order of the Family Court. The same is true of personal retirement plans, e.g., traditional IRA, Roth IRA.
Corporate defined benefit plans and some defined contribution plans, however, are controlled by federal law which pre-empts State court orders. See ERISA [Employee Retirement Income Security Act, 29 U.S.C. section 1001, et seq.]. Therefore, a Family Court domestic relations order, in order to have any effect in dividing assets of these plans, must “qualify” under the requirements of ERISA. The order is therefore called a QDRO [Qualified Domestic Relations Order]. Whether or not a QDRO qualifies under ERISA is determined by the plan administrator. Government plans are exempt from ERISA, but have their own rules that must be complied with, e.g. CalPers pension plans are controlled by PERL [California Public Employees Retirement Law, Govt. Code section 20000, et seq.]. In common parlance, these complying orders are often also called “QDROs.” CalPers provides two sample complying QDRO’s, one of which evaluates payment for the Participant based on his/her income on the date of retirement, but evaluates the ex-spouse’s benefits based on Participant’s income at the time of the Judgment of Dissolution of the marriage. The other evaluates both on the date of retirement. To be “qualified”, a proposed QDRO must, among other things, state the amount or percentage of Participant’s benefits that are to be paid to the Alternate Payee, or the manner that it is to be determined, and the number of payments or period to which the order applies. Other provisions may be included in the QDRO, subject to the plan administrator’s approval. There are certain things that the QDRO cannot do, including the following:
-require the Plan to pay any benefit of option not otherwise provided by the Plan.
-require the Plan to provide benefits that exceed the value of the Participant’s interest as determined by an actuary.
-require payment to an Alternate Payee that is already payable to an earlier Alternate Payee.
Anyone dealing with the evaluation and/or division of a pension or retirement plan would be wise to obtain a copy of the plan summary and other plan materials, and of relevant publications, such as “QDROs, The Division of Pensions through Qualified Domestic Relations Orders, published by the U.S. Department of Labor, available at the website: www.DoL.gov.