Long Beach Retirement Distribution Lawyers

Posted By admin, On September 19, 2020

Retirement Savings: A Most Valuable Asset

In the lives of many Americans, retirement savings is among their most significant assets. Estimates from the U.S. The Department of Labor show that as of 2014, approximately 50 million private wage and salary workers in the United States had coverage in the form of employer-provided retirement plans. Accordingly, one of the most critical considerations in a separation or divorce is precisely if and how to divide retirement benefits among the parties. This is where your experienced Long Beach retirement distribution lawyer comes in handy.  

Are Retirement Savings Considered Community Property?

In general, the pension or 401K retirement savings that you and your spouse earn during marriage is indeed considered community property. That means that in the event that you divorce, you are entitled to half of those savings earned during the marriage. Your spouse is obligated by law to disclose their pension/401K savings details.

Who Distributes the Retirement Savings in a Divorce?

In a divorce proceeding, the court has the authority to distribute retirement savings according to the family code law. That said, the court does not have power to order a company to distribute the pension/401K until they have been made a “noticed party” to your divorce case. This means that the company has been notified using the proper legal procedure and they are now joined to your case.  Once they have been joined as a party, your Long Beach retirement distribution lawyer will determine what each spouse is entitled to from the retirement savings.

Distributing 401 (K) Retirement Funds

Pursuant to California’s community property rules, in the absence of a premarital agreement, retirement plans — like other assets of the marriage — would be divided in half. When dividing up a 401(k) or other pension plans, the non-participant spouse receives fifty percent of the value the retirement plan accrued, but only those funds earned in the course of the marriage. If the person started that job before he or she got married, then any funds that accumulated before the marriage are considered separate property and the spouse is not legally entitled to it.  

This rule applies just the same to employment-based retirement plans such as simple IRAs and SEP-IRAs, retirement plans financed by family-owned businesses and private employment plans, including traditional IRAs and Roth IRAs.

An Example of Retirement Distribution

In this scenario, only one spouse worked during the marriage. 

The working spouse had a 401(k) plan and worked a total of 1200 months.  Eight hundred of those months were during the course of the marriage. 

Eight hundred months is ⅔ of 1200 months. Therefore, the nonworking spouse would be entitled to fifty percent of two-thirds the value of the 401(k) plan.

Options for Distribution of a Retirement Plan

Distributing retirement funds in a divorce can be simple or complicated, depending on the spouses’ wishes and willingness to negotiate a compromise.

There are two main options for distributing a retirement plan in a divorce

  1. The spouses can agree (or a court may order) that the non-participant spouse will receive his or her pay-out at the time that the participant spouse does, upon retirement.
  2. As an alternative, the spouses can agree (or a court might order) to assign the entire value of the retirement plan to the participating spouse and give other community property to the non-participant spouse.

Each of these options has advantages and disadvantages with regards to tax consequences, valuation of the future value of the retirement plan or plans and evaluation of the financial risks of relying on future payment when the retirement plan is not in payment status.

Retirement Distribution in a Long Beach Divorce: More Complex Than Other Community Property

Your Long Beach retirement distribution lawyer will provide you with a clear explanation of California’s community property legislation as it applies to retirement plans and help you choose the best negotiating position. They will have a deep understanding of the often complex technical requirements for dividing retirement plans, including writing Qualified Domestic Relations Orders in accordance with the Employee Retirement Income Security Act of 1974 (ERISA).The Qualified Domestic Relations Order (QDRO)

One detail that sets pensions and certain other retirement accounts apart from other types of community property (assuming they qualify as community property under your unique circumstances), is their involvement as a third-party administrator. When you have a pension, the plan administrator is under a strict obligation to distribute pension payments to you in accordance with the terms of the plan. In order to direct payments to a former spouse, the plan administrator needs what is referred to as a Qualified Domestic Relations Order (QDRO). A QDRO is a special kind of court order, and it is required regardless of whether you and your spouse settle your divorce amicably or take your problems to trial.

For certain types of retirement plans, obtaining a QDRO first requires “joining” the plan as a party to your divorce. This is a complicated procedure, and one that requires the help of an experienced retirement distribution lawyer. Some examples of plans that necessitate this “joinder” in order to obtain a QDRO include:

  1. State government plans, such as California Public Employees’ Retirement System (CalPERS), California State Teachers’ Retirement System (CalSTRS), and University of California Retirement System (UCRS) plans.
  2. Federal government plans, such as Civil Service Retirement System (CSRS), Federal Employees Retirement System (FERS), and Foreign Service Pension System (FSPS) plans.

Those plans that are covered by ERISA, including private company pensions, employee stock ownership plans (ESOPs), profit-sharing plans, and severance plans do not require joining the plan, but you still need a QDRO. On the flipside, individual retirement accounts (IRAs) and Roth IRAs can usually be divided without a QDRO.  That said, some other form of court judgment or order would still be required.

Retirement Benefits as a Future Support Mechanism

To the extent retirement benefits accumulated and/or are attributable to a spouse’s efforts and labor during the marriage, they need to be appropriately disposed of in connection with the division of community property. Nevertheless, given the potential future benefit inherent in a retirement plan, these benefits may also be considered as a source of support and/or as an asset available to effectuate an equal division of community property. Consulting with a knowledgeable Long Beach retirement distribution lawyer will help you get familiar with the characteristics of your particular retirement plan.  This way, you can make sure that the intended division of a plan is realized through appropriate valuation analysis and distribution methods.

Acquired Retirement Benefits in California

In the state of California, retirement benefits are “acquired” when a plan’s economic value is created. In other words, the amount or portion of a spouse’s retirement benefit that is to be considered a divisible marital asset is determined by the period of time it was earned by a spouse, as opposed to when it was received.

Two major types of retirement plans exist for American workers: defined benefit plans and defined contribution plans. The defined benefit plan promises a specified monthly payment benefit at retirement, either in the form of an exact dollar amount or through a plan specific formula that is based on salary and service. Even though defined benefit plans are less ubiquitous in the private sector today, they are still used in public employment areas such as the State Teachers Retirement System (STRS), Public Employees Retirement System (PERS) and in numerous positions in law enforcement. 

The alternative, defined contribution plans, don’t promise a specific monthly payment benefit amount at retirement. Instead, the employee and their employer contribute an agreed upon sum of money to the employee’s individual account in the plan. Upon retirement, the value of an employee’s account is reliant upon how much is contributed and how well the investments perform. Some examples of defined contribution plans Profit sharing plans, 401(k) Plans, Simplified Employee Pension Plans, Employee Stock Ownership Plans, and Savings Incentive Match Plans for Employees of Small Employers.

Deciding How to Distribute Retirement Funds

Under some circumstances, the right to benefits earned during marriage can be assigned in part to the nonemployee spouse as part of an “in-kind” division. On the other hand, community property interest can also be disposed of through a “cash-out” division.  This method assigns the benefits completely to the employee spouse. 

That said, there is no “best” way to distribute retirement benefits. What the “best” scenario is in a specific case will depend on a variety of factors.  These factors include the type of retirement plan, the nature of the participant’s retirement benefits, and why the parties are seeking to split up those benefits. For instance , tax consequences and/or determining whether benefits are being split up to provide support or simply to affect an equal division of community property could impact which division would be favorable to the receiving party.

What is the Employee Retirement Income Security Act of 1974 (ERISA)

Although the division of marital property is largely governed by California law, in numerous circumstances, the assignment of a retirement interest needs to be compliant with Federal law, namely the Internal Revenue Code of 1986 (the Code) and the Employee Retirement Income Security Act of 1974 (ERISA). ERISA is a Federal law that regulates the operation of most voluntarily established, private-sector retirement plans and sets standards of protection for individuals participating therein. 

ERISA and the Code do not allow a participant to assign or alienate the participant’s interest in a qualified retirement plan to another individual. Under ERISA and the Code, retirement interests are assignable only if the judgment or court order creating or recognizing a spouse or former spouse’s interest in a person’s retirement benefits constitutes a Qualified Domestic Relations Order (“QDRO”). While the majority of employer-based pension plans and 401(k) plans constitute “qualified plans” under ERISA, IRA-based retirement plans aren’t, and therefore they can be assigned to a party in a dissolution action without execution and entry of a QDRO.

Consult Your Long Beach Retirement Distribution Lawyer

Before dividing a retirement plan under a Judgment or other Domestic Relations Order, the spouses should consult their Long Beach retirement distribution lawyer to help you determine whether a QDRO is necessary in order to avoid tax consequences or penalties and/or whether a Domestic Relations Order meets the QDRO requirements under ERISA.