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That’s My Pension

Most of us believe that having worked for their pension over they years, they should get to keep it, even if they divorce. What happens to my pension when I divorce?

In the wake of tumbling real estate values, you may find the most valuable asset of your marriage is your 401k, IRA, stock ownership or pension plan established by your employer.

Defined contribution plans are very popular and relatively simple to evaluate. The employer and employee both contribute to the account which is held in a financial vehicle such as a 401k, IRA or profit sharing plan.

Defined benefit plans differ in that they provide a monthly fixed amount to the employee over a course of time. Each plan is tailored differently and takes into effect variables such as: the employee’s years of service, final salary and the age of the employee upon retirement.

Valuation is key. A defined contribution plan is relatively easy to value; it is usually the balance in the account. A defined benefit plan is more difficult to value because its value depends on variables.

In Connecticut, the concept of equitable distribution in a dissolution of marriage, requires that the Court consider whether the retirement plan or account is a marital asset. In other words, was this plan an asset incurred or owned during the course of the marriage, if so, it should be divided between the spouses? The name on the plan is not dispositive of the ownership of the plan.

There is no applicable statute, here, indicating that premarital assets are exempt from equitable distribution. Therefore the parties may present evidence to show why or why not the pre marital portion of the asset should be subject to distribution between both parties.

Often the decision is made that the value of the asset prior to the marriage be kept by the owning spouse and that only the amount accrued during the course of the marriage is divided. However, this is an arguable point and if this plan is a significant asset, the services of an attorney are usually warranted to determine who gets how much of the asset. Since the rules of equitable distribution are very broad, if you find yourself before a Judge, that Judge will have very broad discretion to decide who gets what portion of a marital asset. Statutory factors contributing to the break down of the marriage, one of which is “fault for the breakdown of the marriage,” may carry weight with the Judge and her distribution of the assets unequally may result.

Under Connecticut law you are married until you are divorced. Therefore, any increase or decreases occurring, in your plan, between the time of the filing for divorce and the actual dissolution of the marriage, will be subject to distribution to both parties. The Court or the parties, if by agreement, will decide how much of the retirement asset shall be assigned to each party. Once the division of the marital assets is made, the parties need a means by which to divide and transfer the asset. The primary method for this distribution is by QDRO.

In short a QDRO (qualified domestic relations order) is a an order that creates or recognizes the existence of an alternate payee’s right to receive, assign or transfer benefits payable to the plan participant under a retirement plan . That order must include certain information and meet specific requirements. Since QDRO’s have to meet certain statutory requirements to be effective, you will want to make sure that they are properly drafted. Some companies have forms available for drafting a QDRO, while in other cases they must be drafted by hand.

Once the QDRO has been approved by the employer, it must be sent to the Court where it is converted into an Order of the Court. Assuming the QDRO is properly drafted this Order of the Court allows the parties to transfer their retirement assets without incurring a penalty for early withdrawal from the IRS.