How Divorce Courts Split Retirement Plan Assets

Divorce is one of a handful of commonly encountered situations that affect retirement planning. But the impact of divorce on your retirement assets will depend on the kind of retirement planning you and your spouse have done. The guidelines that follow apply to employer-sponsored qualified retirement plans (for information about divorce's impact on other types of retirement savings, see this discussion).

Employer-sponsored qualified retirement plans are divided into two broad classes: defined contribution plans and defined benefit plans. A defined contribution plan provides a separate account for each employee, and its benefits are based solely on contributions and certain other amounts allocated to that employee's account.

In contrast, a defined benefit plan obligates the employer to pay a specified annual or monthly pension amount to each employee upon that employee's retirement. This is the classic retirement or pension plan. The employee's interest in a defined benefit plan is derived not from the value established in his or her name, but from the amount of the pension promised to the employee upon retirement. Clearly, the manner in which the value of your interest in a plan is determined will vary depending on the type of plan.

Courts use two basic techniques to divide an individual's interest in a retirement plan. The first technique is known as a present division of benefits. Under this method, the court first determines the value of the employee's benefits as of the date of divorce or another appropriate valuation date. It then awards all of the benefits to the employee while making an offsetting award of other property to the spouse.

The second technique is the deferred division of benefits, which is sometimes referred to as the "if, as, and when" method. Under this method, there is no need to make a present valuation of the employee's interest because the court awards an appropriate share of the employee's benefits if, as, and when they are paid. The formula for determining the appropriate share may be determined at the initial hearing, or the court may simply reserve jurisdiction to determine the appropriate division in the future.

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