When you’re getting a divorce, you may wonder if your spouse has a claim on any of your retirement benefits. Or you may hope that you can claim a share of the family’s retirement benefits because you did not factor a divorce into your life plan until recently, and you have been counting on those benefits for your retirement. For many, both the potential “givers” and the “receivers” of these benefits, this topic is of paramount importance during a divorce process, particularly in longer marriages or for those individuals who have limited working years ahead of them. Retirement benefits typically fall into three categories: retirement savings plans, Social Security benefits and military pensions. If you’re wondering how divorce will impact your retirement benefits, here’s what you need to know.
Why are Retirement Plans Divided in Divorces?
In Florida, retirement benefits are considered a part of the marital estate and are subject to equitable division in a divorce. Equitable does not necessarily mean “equal,” but a fair division taking many factors into consideration. Retirement benefits are generally not the separate property of only the spouse who works outside of the home during the marriage. To the spouse who feels he or she is “losing” a portion of a retirement plan, this is often very troubling and perhaps not really intuitive. The reasoning (and the law) in regard to this enforced division is at least two-fold:
- If you and your spouse were not divorcing, he or she would benefit from your retirement accounts in the future. In fact, this was likely your plan together. You and your spouse probably together used these accounts in calculations to properly finance your family’s retirement plan, your retirement standard of living plan for the both of you. Divorce changes that plan of course, but each spouse legally retains some right to the benefit.
- The non-working spouse, or the lesser-working spouse, still contributed to the marriage and the retirement plan, even if only in non-monetary ways, thus helping the team so to speak. In many cases, a non-working spouse cares for children, provides marital home upkeep, and/or handles the home management so that the working spouse may work and save for retirement. The lesser-working spouse may not be entitled to half of the benefits, but those benefits accrued during the marriage, like the rest of the marital estate, must be divided equitably.
How Do You Determine if Retirement Savings are Marital Property?
If the retirement plans are opened and participated in during the marriage, the full value of the plan and its benefits are subject to division as part of the marital estate. The only exception would be any contributions that were made to the plan after separation, but prior to the final divorce.
In the event of a retirement plan that predates the marriage, the portion of the plan that accrued prior to the marriage would be considered the separate property of the contributor, and thus not a marital asset. The increase in value of the retirement account from the date of the marriage to the date of the separation (or any distribution of the funds) is considered marital property, and subject to division along with the rest of the marital estate.
Any retirement plans that are opened post-separation, and are funded with only post-separation separate income, are separate property and therefore not subject to equitable distribution.
How are Retirement Benefits Divided in a Divorce?
Retirement benefits may be divided in a divorce in a couple of ways. Most commonly, a Qualified Domestic Relations Order (QDRO) is used at the time of divorce to divide a benefit between the two parties. This type of Order recognizes an alternate payee (a financial non-contributor) who has a right to receive all or a portion of benefits payable to a participant under a retirement plan. When a Judge signs a QRDO, the benefit provider is then bound to divide the benefit, usually to create an account in the name of the former non-participant, effectively making the one account into two separate accounts, one in the name of each party. With a QDRO, both parties in a divorce may be able to avoid tax liabilities and penalties associated with early withdrawal or capital gains that come along with distributing retirement funds at the time of the divorce instead of at retirement.
These transfers, during a divorce, are non-taxable events. (This is not tax advice: always consult a tax Attorney or a CPA for tax advice.) Alternatively, one spouse may retain the entirety of a particular retirement benefit, and may instead compensate the other spouse with other assets, such as a house or an investment account to make the overall result equitable. In this scenario, one spouse effectively “buys out” the other spouse’s interest in the retirement benefit. This saves administrative hassle at the time the benefits pay out also, and can be a good idea for an individual who expects retirement benefits to accrue substantially in the future before eventual payout. However, this type of arrangement can have capital gains and tax consequences for the spouse receiving the assets to offset the retirement benefits, so it is important for both spouses to understand the all potential consequences.
- Social Security and Divorce: After a divorce, an ex-spouse may be entitled to receive Social Security benefits based upon the earning record of his or her ex-spouse, if he or she meets certain requirements. To begin with, both ex-spouses must be entitled to either Social Security retirement or disability benefits. This means that the ex-spouse whose earning record is being used must be 62 years old or older and also that the ex-spouse seeking the benefits must have reached full retirement age. In addition, Social Security will not disperse benefits unless an application is made to the Social Security Administration. The ex-spouse seeking the benefits must also sufficiently demonstrate that:
- The marriage lasted for 10 years or longer.
- The ex-spouse seeking the benefits is unmarried
- The benefits the ex-spouse is entitled to receive based on his or her own earning record is less than the benefits he or she would receive based on the other ex-spouse’s earning record. In order for an ex-spouse to apply for, or to receive, benefits under the ex-spouse’s earning record, he or she must be unmarried by divorce, annulment, or death. If the ex-spouse seeking the benefits has remarried and divorced again, but meets the requirements under the second marriage as well, then he or she may choose to take either his or her own Social Security benefits, or to apply for benefits from the earning record of either ex-spouse.
Ultimately, benefits paid to the ex-spouse who is seeking the benefits will not affect the benefits paid to other family members or the ex-spouse whose benefits are used. There is no need for the ex-spouse whose benefits are sought to make an application for Social Security benefits in order for the other ex-spouse to seek and receive the benefits him or herself. This Social Security claim is separate and independent of the other party’s benefits, and has a value that does not affect the other party in the divorce, so there’s no need to “offset” this retirement benefit.
- Military Pensions: Federal Law allows state courts to treat disposable retired military pay as property divisible in accordance with the laws of the state court. How does the Court typically divide this military pension? Technically, a state court can divide retired pay by any legal standard, according to its state law or its Code. In order for the Department of Defense (DOD) to pay a portion of a military member’s retired pay directly to the former spouse, the following guidelines must be met:
- The ex-spouse must have been married to the military member for a period of at least 10 years, with at least 10 years of the marriage overlapping a period of military service creditable to retired pay.
- Direct payments will not be made for division of retired pay in excess of 50 percent (even if there is more than one ex-spouse, the total of all payments cannot be over 50 percent).
- Disability pay is not subject to division as property in a divorce, except by agreement of the parties. It is however subject to garnishment for alimony or child support.
- Alimony or child support can be paid directly in addition to division of retired pay. In this event, DOD Finance will not pay over 65 percent of an individual’s disposable retired pay for property division and alimony/child support.
If the criteria above are not met for direct payment by DOD, the retired member may be directed by the Court to personally pay the portion of the military pension allotted to the former spouse directly to the ex-spouse. Usually the retiree can set up direct pay to the ex-spouse through an allotment.
Ultimately, retirement benefits and their equitable division can dramatically complicate your divorce and increase your costs in legal fees — especially if you have substantial benefits, if you need to maintain all or most of your retirement benefits due to age or declining opportunities, or if you have retirement benefits that predate your marriage as well as retirement savings from during your marriage. In many cases, the law is much more art than science. Every Attorney knows the law (we hope!); you need an Attorney who sees the trees but can guide you through the larger forest with YOUR goals in mind, to include your tolerance for legal fees and a candid cost-benefit analysis.