Timothy F. Rayne, Esquire

When filing for divorce, retirement benefits  –
like other assets in a marriage  –  are subject
to equitable distribution

Like real estate, bank accounts, cars and other assets acquired during a marriage, retirement benefits are subject to division in the equitable distribution process during a divorce. Understanding what types of retirement plans exist, how the plans are valued, what portions of the plans are subject to division, and how they can be divided is important when one is contemplating or facing a divorce action.

Types of Retirement Plans
Essentially, there are two types of pension plans: defined benefit plans and defined contribution plans.

Defined benefit plans, or traditional pensions, are plans in which the employer promises that, during retirement, it will pay an amount of money to the employee based upon a pre-established formula, usually involving the length of employment and level of salary. Defined benefit plans often offer monthly payments or a lump sum distribution upon retirement.

Defined contribution plans, such as 401(k) plans, are plans in which the employee and/or employer make contributions into an account segregated for the employee. Upon retirement, the employee gains access to the funds in the account.

Determining the Value of the Plan
In order to equitably divide the retirement plans, they first must be valued as of the date the parties separated. Since the value of a defined benefit plan is uncertain (because the number of years worked, retirement date and retirement salary are uncertain), actuarial experts must calculate a present value for the pension. Defined contribution plans, however, are much easier to value. Their value is determined by the account balance on the date of separation.

What Portion of a Retirement Plan is Subject to Division?
Like other assets, only the portion of a retirement plan earned during the marriage – but before separation – is subject to division. Benefits earned prior to marriage or after separation are excluded.

With defined benefit plans, a "coverture fraction" must be calculated to determine the marital portion of the benefits. In this formula, the denominator is the number of years that the employee earned the benefit and the numerator is the number of years that the parties were married. For example, if the employee earned the pension for twenty years but the parties were only married for ten years, only one-half (10/20) of the pension would be subject to division.

For defined contribution plans, no "coverture fraction" is needed. If an employee's 401(k) balance was $100,000 at the time of marriage and $200,000 at the time of separation, $100,000 would be subject to division.

Division of Retirement Plan Assets
The allocation of a retirement plan is determined like any other asset  –  by considering the equitable distribution factors. Retirement benefits can be divided either through an immediate offset or through deferred distribution.

With immediate offset, the retirement benefit is valued and then the employee spouse offsets the value of the benefit by giving up an asset of equal value. For example, a $100,000 pension can be offset by $100,000 in equity in the marital home.

With deferred distribution, the parties agree that the non-employee spouse will receive his or her share upon the retirement of the employee spouse, rather than immediately. Deferred distribution is common when there are insufficient assets to accomplish an immediate offset.

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