If you and your spouse are getting a divorce and one of you has a retirement plan, you are probably wondering how the plan will be divided in your divorce.
Generally, it is the retirement benefits that were acquired during the marriage (marital retirement benefits) that are subject to division. This means that the spouse gets to keep their "separate" benefits, which refer to the retirement benefits acquired before the marriage or after the separation.
With the traditional pension plan, the employer contributes to the plan during the participant spouse's term of employment. In the usual scenario, the participant spouse receives their benefits once they retire (or when they reach a certain age) in a fixed monthly payment or in a lump-sum payment.
While retirement plans are divided into defined benefit and defined contribution plans, we typically deal with spouses with defined contribution plans in the forms of:
- 401(k) plans
- Profit-sharing plans
- Individual Retirement Accounts (IRAs)
Usually, a defined contribution plan, such as one of the above plans can be liquidated, however, when this is done it triggers hefty taxes and penalties.
Determining 'Marital' and 'Separate' Property
Let's say that the plan is question is in your spouse's name. If your spouse's plan was created before your marriage, the plan is probably co-mingled, which means the portion of the plan that existed before the marriage is "separate property," and the portion that increased in value after the date of marriage is considered "marital property."
On the other hand, if you have been married for 15 years and your spouse's plan was created in your fifth year of marriage, your spouse's entire plan would be considered marital property and it would be subject to division.
However, if you and your spouse separated and contributions are made to the plan after the separation, your spouse's plan would be considered to be "co-mingled," and the contributions made after the separation would belong to your spouse, and would not be subject to division.
If your spouse did not create their plan until after the separation, the plan would be considered separate property, and it would be excluded from the marital estate.
Since Pennsylvania is an equitable distribution state, retirement plans are not necessarily divided 50/50 down the middle.
If a divorcing couple cannot reach an agreement over how to divide a retirement asset, the courts will make a decision based on what is equitable or fair after reviewing several factors, such as the length of the marriage, and each spouse's age, health and income.