Going through a divorce forces you to look at nearly every aspect of your life from a new perspective, and to confront the reality that the emotional and financial foundation you’ve spent years buildings has to be re-evaluated and rebuilt.
Of all the assets accumulated through the course of a marriage, retirement funds are among the most challenging for many to address. In most cases, the funds represent both sweat equity from their labors to support themselves and their family, and a future they’d anticipated spending together, now taken away from them. The rules around retirement accounts have contributed to the sense that they are untouchable, and that can make negotiations around them fraught. Still, just as is true of bank accounts, stock portfolios, real estate and other investments, they are assets subject to Pennsylvania’s rules of equitable distribution. However, the prohibitions against early liquidation have led to special processes and forms being created to allow them to be divided without either party being penalized.
Are the Funds Marital?
The first question that needs to be answered is whether the retirement funds were accumulated during the course of the marriage or beforehand. Any accounts set aside prior to the marriage are considered separate, while those earned during the marriage are considered marital, and therefore subject to equitable distribution. If the plan started after the marriage then all contributions are marital but if established before marriage and continued through the marriage it is considered co-mingled, and that means that some complicated tracking will need to be done to separate out what is marital. In most cases, anything that started after the date of separation is not considered marital or part of the marital estate.
The Question of Equitable Distribution
Once marital assets have been separated out and evaluated, the various factors taken into consideration for equitable distribution will be applied to the funds. Equitable distribution looks at a number of elements, including how long the marriage has lasted, how old each partner is, their health, income, age, and earnings capacity. These are generally used to calculate a percentage of assets each spouse will walk away from the marriage with.
What Types of Retirement Funds Are Owned?
Retirement plans can be pension plans, which are referred to as defined benefit plans, or they can be defined contribution plans such as 401(k) plans, profit-sharing plans, and IRA accounts. The difference is important, as defined benefit plans are funded by employers during employment but aren’t received until after retirement, while contribution plans are funded by both the employer and the employee. The two are treated differently because of the difference in how they are funded and paid out.
For pension plans, the courts generally assess the plan’s value, divide it according to the equitable distribution factor, and then creates either am immediate offset that allows the pensioned employee to retain the plan in exchange for another asset or a deferred distribution for the non-employee spouse that is similar to the plan in place for the employee eligible for the benefit. This usually means that payments begin being distributed monthly when each reaches the age of 65. Another option is for the court to order the spouse scheduled to receive benefits o pay a portion to their ex when they start receiving them.
If the employee spouse’s employer has been contributing along with the employee to a 401K or similar defined contribution plan, the account holder is often ordered to take the percentage of the fund’s value dictated by the equitable distribution calculation and rollover that amount into an IRA, or to liquidate the entire amount to allow the proceeds to be divided. When an account needs to be divided in a divorce, the courts use a special order called a Qualified Domestic Relations Order, or QDRO, to ensure that rights are preserved and each spouse is treated fairly.
If you are concerned about the fair distribution of your assets in a divorce, our experienced attorneys can help. Contact us today to learn more about how your assets can be managed in a fair way, and all of the other challenging aspects of divorce.