Equitable Distribution of Spouse’s Retirement Benefits
The settlement of most divorce actions in New York includes the distribution of the parties’ retirement plan benefits. A spouse’s interest in the other spouse’s retirement may be divided, without tax consequences, by a transfer to a spouse or a child that is authorized by a Qualified Domestic Relations Order (QDRO).
Most pension plans are governed by the Employees Retirement Income Security Act, which applies to employer-sponsored plans and limits the time, manner and method of the distribution of the plan benefits.Two Kinds of Qualified Retirement Plans
There are two types of “qualified” retirement plans: defined-benefit and defined contribution.
A defined-benefit plan pays a particular benefit at the time when the participant retires. Fundamental retirement benefits are paid during a person’s life, starting at the plan's usual age of retirement.
The defined contribution plan provides individual accounts for each person. The benefits are calculated based on the sum contributed to the retirement account, and any additional income, gains, losses, expenses, and any forfeiture of other participants’ accounts that are allocated.
Usually, these retirement plans allow benefits to be paid out in one lump-sum reflecting the whole account balance of the participant.Distribution of Benefits
Before an interest in a retirement plan is transferred to a spouse, it must be authorized by a Qualified Domestic Relations Order. Most benefits provided by qualified retirement plans are paid during the participant's life, and "survivor benefits" are paid to beneficiaries after the participant's death. A spouse can assign these types of benefits to an alternate payee.
- Separate Interest Method
The "separate interest" method divides benefits into two parts, one for the participant and one for the spouse. A QDRO may transfer to the spouse all or part of the other’s retirement benefits.
- Shared Payment Method
Retirement payments are divided between the spouses; payments are made when the pension participant spouse retires. In a case where a QDRO will transfer a certain percentage of the payment of benefits, instead of a dollar amount, then, unless it is otherwise provided by the QDRO, the other payee automatically receives a share of any increase of the participant’s benefits or future subsidy.
- Transferring Survivor Benefits
Included in survivor benefits are payments to surviving spouses after the death of the participant. A QDRO can provide that a ex-spouse be treated as the spouse of the participant for the benefits payable upon the participant's death. If the participant spouse dies before the QDRO is approved having elected a life-only annuity payment prior to marriage, the recipient spouse may receive nothing because the deceased participant’s election of a form of a pension under an ERISA plan is irrevocable.
If the participant retires and receives payments before the QDRO becomes effective, the spouse may not receive any share of those payments because the plan administrator is not required to make retroactive payments. Therefore, if the intention is to share the payments, the QDRO must be approved before the participant retires.
Most of the benefits provided by qualified retirement plans are retirement benefits that are paid during the participant's life and survivor benefits are paid to beneficiaries after the participant's death. After the death of the participant, the retirement plan pays the surviving spouse a monthly (or other interval) amount, that is a minimum of 1/2 of the benefit paid to the plan participant.“Alternate Payee” is treated as a Spouse
A QDRO can provide that an ex-spouse should be treated as spouse of the participant for benefits that are payable when the participant dies. If the ex-spouse is to be treated and seen under the retirement plan as the spouse of the participant according to a QDRO, than any subsequent or new spouse of the participant will not be recognized as the surviving spouse.
"Spouse" means the spouse of the participant at the time he/she elects one. A pre-nuptial agreement waiver, therefore, the rights of a surviving spouse in a ERISA governed retirement plan of the participant spouse is not longer effective. This is because the person making the waiver is not the participant’s spouse, only a “spouse to be.”
Ingrid Gherman, an attorney with more than three decades practicing matrimonial law, has a wealth of experience to offer you in understanding how retirement benefits are distributed between spouses who are divorcing. If this is an issue in your divorce or separation, contact Ingrid Gherman’s office to set up a consultation at which all your questions and concerns will be addressed. Call (212) 941-0767 or send the on-line inquiry form today.