When a couple goes through a divorce, the court determines how to divide their assets. Real estate holdings, savings, and other assets acquired during the marriage are subject to division.
If you are going through a divorce, you may wonder how Pennsylvania courts divide retirement funds.
How are Assets Distributed in a Divorce?
Pennsylvania law requires that all marital property be divided between spouses, including pensions and other retirement accounts. However, this doesn't mean they'll be split 50/50. After considering the equitable distribution factors, Pennsylvania will make an “equitable” (not equal) division of the entire marital estate.
Pennsylvania Statues Section 23 Chapter 35 Section 3502 provides a list of all factors the court considers when determining how marital property will be divided. These factors include:
- How long you were married
- Whether either of you had a previous marriage
- Your age, health, skills, employability, income, assets, debts, and needs
- The roles you each played in each other's training or education or to increase each other's earning power. For instance, if you stayed home to care for the children while the other spouse attended school or worked.
- Your sources of income, including retirement accounts and benefits
- Your ability to earn money or acquire assets in the future, including through inheritance
- The value of any non-marital assets you may have
- Your standard of living throughout your marriage
- Tax implications of dividing the property
- Costs involved in transferring or selling assets
- Who will have custody of your minor children
What Happens to Retirement Funds in a Divorce?
Pennsylvania law states that all assets acquired or earned during a marriage are marital assets—meaning your retirement accounts, pension, and any other retirement benefits will be divided between you and your soon-to-be ex-spouse. However, you would retain retirement funds that aren't considered marital assets.
Determining if Retirement is a Marital or Non-Marital Asset
Any funds you contribute to a retirement account after your marriage, or any credit you receive toward a pension after marriage, would be considered marital assets. These will be subject to division.
However, if the retirement plan contains contributions made before marriage or after the date of separation, it will be deemed to have co-mingled funds, which means part of the account or benefit would be deemed “marital” subject to division, and another part of the account would be deemed “non-marital” and not subject to division.
Does the Type of Plan Matter?
There are generally two types of retirement plans:
Defined benefit retirement plans
These include traditional pension plans. Employees' benefits in these plans are often based on receiving a certain number of “credits” often based on how many months/years a person works for the company.
When you retire, you receive your benefits through fixed monthly payments or a lump sum, which amount is based in part on how many “credited” months you have participating in the plan.
Because these benefits are payable in the future, it can be challenging to determine the current value of the retirement account, but there are experts that can be hired to analyze the equivalent cash value of any traditional pension plan.
Distribution may be deferred after the retirement of the spouse in those cases where there are not enough assets to distribute to the non-participant spouse to create an equitable distribution of the value of these types of plans.
Defined contribution retirement plans
These include 401(k) plans, IRAs, and other plans to which cash is contributed by an individual and possibly their employer. They can be liquidated before or after retirement (subject to taxes and fees if before retirement age) and are divided based on their marital value.
Distributions from these plans to the non-contributing spouse are made through special court orders known as Qualified Domestic Relations Orders that exempt the withdrawal from taxes and fees because the withdrawal is happening due to a divorce.
How is the Value of the Plan Calculated?
If you have a pension plan, the value of your plan may be difficult to calculate. Many divorcing couples hire an expert such as an actuary to evaluate the value of the plan.
These professionals use a formula and various factors such as the employee's current salary to determine the value of the pension plan.
If you have a defined contribution plan, its value will be calculated by subtracting the contributions made before the marriage or after the separation date from the value as of the date the parties separated, and then also accounting for any gains/losses on the marital vs. non-marital portion of the account through the date of settlement, hearing, or distribution date, depending on the case.
What is a QDRO?
A Qualified Domestic Relations Order (QDRO) enables companies that manage retirement accounts to divide the benefits between spouses.
This order sets forth the value of the retirement benefits and the rights of each spouse and provides instructions for distributing the benefits.
What is the Process for Creating a QDRO?
If a QDRO is necessary to effectuate an equitable distribution of your assets or retirement accounts, an expert is usually hired to draft this very specialized Court Order.
That company or attorney will work with your attorney, your spouse's attorney, and the plan administrators to ensure the language of the QDRO matches the agreement of the parties and complies with any policies or requirements of the plan administrators.
If the agreement requires an immediate distribution from the retirement account that will usually occur within 4-6 months after the final decree in divorce.
If the agreement is to divide a stream of income from a traditional pension plan, that will not occur until the plan participant reaches retirement age, or other date as permitted by the plan administrators, but the final Court Order approving that distribution will be entered appropriately 6-9 months after your final decree.
Contact Gibson Family Law, PLLC for Help
Division of assets during a divorce can be a difficult and complex process. Our team has extensive experience guiding clients through the divorce process. We will work to ensure your rights are protected and that you get a favorable outcome.
Attorney Susan Gibson has practiced family law exclusively in Bucks County for nearly 15 years. She's prepared to hear your story and find you the most equitable outcome either outside of court or before a judge.