pen’·sion, noun /penSHÉn/ “A regular payment made during a person’s retirement from an investment fund to which that person or their employer has contributed during their working life.” (en.wikipedia.org/wiki/Pension) In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment.
You’ve been with your current company for the past 14 years making a modest income. Your spouse of 10 years is a stay at home homemaker and takes care of your 2 kids, ages 5 and 7. Your company has a great 401k that matches your contributions up to $1500, is tax deferred and should even allow you to retire in a lower tax bracket. At age 37, you’ve got around $145,000 in there so far and since you are making the maximum contributions, you’re looking at $2.7mil at age 62 when you hope to retire. Life is good! But then the unthinkable happens, you are served divorce papers at the office. What will become of your million dollar retirement? Well, it’s your job, you are the one that is working and contributing to the 401k. There shouldn’t be a problem with your pension and divorce, it’s your pension plan not your spouse’s, right? Well, not so fast, you might want to sit down for what’s next.
What About Your Pension and Divorce?
According to National Paralegal.edu, pensions are marital property and are subject to division and distribution in divorce. Almost all states which do not have community property laws (only nine states have community property laws. AZ, CA, ID, LA, NV, NM, TX, WA, and WI) divide property according to equitable distribution laws which allow the courts to divide property equitably between the spouses. Like under community property laws, separate property acquired before or during the marriage is not divided upon divorce. Rather, the property is returned to its particular owner. So for the first 4 years of employment, when you were single, any benefits earned are your separate property. However, the benefits earned over the last 10 years are subject to division and distribution even though your spouse did not make a contribution to the pension plan. When it comes to your pension and divorce, your pension is marital property.
Do You Need Professional Help When Dealing With Your Pension and Divorce?
So how will your pension be divided? Is your ex-spouse entitled to receive future payments? How is the value of the pension plan determined? Should you use a dollar amount or percentage when agreeing on what the split will be? There are many mistakes that can occur and leave you with an uneven split, even though it seems like everything is equal. For example, let’s say you decided your spouse will receive $60k of the $120k value of the portion of your pension that is considered marital property. That sounds fair, a 50/50 split, no problem. Well since the time you reached the agreement of $60k the market has taken a plunge and your $120k value is now $80k. The agreement was $60k, a dollar amount not a percentage, to your spouse; you’re left with $20k. You just got the shaft.
There are provisions in Employee Retirement Income Security Act of 1974 (ERISA) that gives spouses and divorced spouses some rights in a workerâ€™s pension plan. This is a very confusing area and you would be best served seeking the advice of an expert in dealing with pensions and divorce. Attempting to handle your pension and divorce yourself or by someone not versed in this arena, could cost you your future.