Because there are many retirement plans available to Dallas employees, we will discuss the various plans, and how they are divided in divorce, over a series of posts. We will begin with plans that qualify under a federal law called ERISA.
Part 1: Defined-Contribution Plans – Under this type of retirement plan, the employee, or both the employee and employer contribute money or stock to a retirement account. The contribution is usually based on a percentage of the employee’s salary. The value of the account will depend on the success of the stock, value of the contributions, and the costs of the plan. At retirement the employee receives the value of the account. The employee will usually “roll over” their retirement account into an annuity or IRA to create income over time and gain tax benefits. Today, Defined-Contribution plans are most common amongst private employers, and include:
- 401(k) plans where the employee deposits a portion of their pretax income into a tax deferred account. Many times employers match
- Employee stock ownership plans (ESOPs) where employees invest in their employer’s stock.
- Profit Sharing plan where the employer contributes some portion of profits to the employee based on formulae that can be modified each year.
- Thrift plans: same as profit sharing plan except employee can contribute too
- Keogh: Retirement plans for people who are self-employed.
Community v. Separate – All property a divorcing couple owns is presumed to be community, but a spouse can overcome that presumption with evidence that the property was owned before marriage. In a Defined-Contribution Plan this evidence can be readily available. The employee can contact his plan administrator and request the value of his retirement account on the day of marriage, and the current value; the difference will be community property. This may get more complicated if stock is involved. The increase in the value of separate property, like stock owned before marriage, stays separate, but new stock contributed during marriage would be community property.
Partitioning the account – Once the value of the community’s interest in the retirement account is determined, it is subject to “just and right” division by the divorce court. The court will often assign a fraction of the value of the account to each spouse. The court will then sign an order called a Qualified Domestic Relations Order or QDRO, directing the plan administrator to divide the retirement account and distribute the value to the non-employee spouse. The non-employee spouse can then roll over her share of the plan into an IRA to avoid tax penalties.