When we are talking about the division of assets under New York law, we are talking about the division of both debts and assets that were accumulated during the marriage. The New York domestic relations law has an expansive definition of marital property and a less expansive definition of separate property. Separate property might be a bank account that you held prior to the marriage, that remained in your name during the marriage. Or you may have used that bank account to fund the purchase of a marital residence. If that is the case, you may be entitled to a receiving a contribution.
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When we look at assets, we look at many different components of marital assets. These include, but are not restricted to, retirement accounts, IRAs, deferred compensation, real estate, brokerage accounts, life insurance cash value, jewelry, automobiles, personal property and vacation homes.
When couples divorce, they can divide the assets they’ve reserved for retirement proportionally without tax liability under ERISA, the federal statute that regulates retirement benefits. Whether your retirement plan is a defined contribution or a defined benefit plan, you will need a qualified domestic relations order (that a judge signs and that the plan accepts) to effectuate a division of the marital portion of the fund. This is separate from and comes after a separation agreement.
Dividing a Defined Contribution Plan
A defined contribution plan would include a 401(k), an SEP account, a SIMPLE 401(k), profit sharing, and other similar plans where the employee or “plan participant” contributes to the fund. The plan participant’s employer may also contribute to the plan. These funds do not pay out a guaranteed pension payment upon retirement. Rather, the plan participant can access his or her account at a certain age and withdraw money for retirement.
Dividing a defined contribution plan after a divorce does not involve tremendous difficulties. With a QDRO, the plan provider can divide the plan in whatever proportion the parties agree upon or a judge orders. The non-participating spouse, or “alternate payee,” generally sets up a rollover IRA for his or her share of the funds. The transfer from the plan participant to the alternate payee is not taxable – although there would be a tax consequence for an early withdrawal.
Several issues can arise when dividing a defined contribution fund. For example, an employer may make contributions into the fund for one tax year in the following year. If parties are dividing a fund in a divorce, they need to consider any contributions an employer might owe.
Another issue is the appreciation or depreciation of a defined contribution fund after the date set for dividing the fund. For example, if a 401(k) contains $40,000 and you and your spouse agree to divide that fund equally, you should not simply agree to give or take $20,000 as a one-half share. The 401(k) will likely either appreciate or depreciate before the QDRO can be prepared, signed and implemented. Any agreement must clearly state what will happen to appreciation or depreciation of that fund in the interim period. Likewise, any request to the court to divide a fund must include a request that the appreciation or depreciation of the fund be made a part of the court’s decision regarding the fund.
Dividing a Defined Benefit Plan
A defined benefit plan is more like a traditional pension that provides a set monthly payment at the time of retirement. The plan participant may or may not contribute to the plan. These plans often provide many benefits in addition to the monthly payment upon retirement. For example, they may provide a pre-retirement death benefit, a post-retirement death benefit, a single life annuity, a joint and survivor annuity, early retirement benefits, and more. Each plan has unique benefits and each plan has its own requirements for the preparation of a QDRO.
The benefits that are available (and the impact if those benefits are not preserved) to the alternate payee can be significant. More importantly, if the alternate payee does not specifically set forth the benefits he or she desires in a separation agreement or court order, the QDRO will not include them. For example, if the parties enter an agreement and the agreement is silent on the issue of a survivor benefit, the alternate payee cannot obtain a survivor benefit through the QDRO.
401Ks
Today, it is common for a large portion of a working person’s assets to be held in retirement funds. More often, we see those funds held in deferred compensation plans such as 401Ks, 403Bs, profit sharing, and other types of cash accounts. Division of those accounts is dictated by either a “simple qualified domestic relations order” or a “domestic relations order”, depending upon the type of fund. Assuming that each party will receive 50% of the marital share – which is common – this approach simply divides the marital portion of the account into two shares. The order goes to the plan, and the plan then segregates the funds and executes a rollover of the non-titled spouse’s funds, which generally go into a rollover IRA.
When dividing a defined contribution plan – such as a 401K, 403B, or other money account – the death of the titled spouse should not impact the rights of the non-titled spouse. We usually have an agreement that provides for the non-titled spouse to remain a beneficiary for their share of that fund until the date of division. At that time, another order provides for transfer of their share to them and out of the plan. Death of the titled spouse shouldn’t impact those rights.
Premarital Retirement Account
If you had a 401K or profit sharing plan prior to your marriage, the funds that were in that plan prior to the marriage remain your separate funds. In other words, that money will not be divided in the divorce. Sometimes, issues may arise around what happened to the portion that was premarital versus what has gone into the plan since the marriage. For example, if you had a sizeable sum invested in the plan, that sum may have appreciated in value. Then, if you put additional funds into your plan and those funds also appreciated, it may be necessary to hire an expert who can make the appropriate calculations and help determine what portion of the plan remains separate property and what portion is considered marital. Those experts can calculate specific amounts and furnish hard and fast totals that will assist in properly – and fairly – dividing your plan.
Dividing retirement accounts in New York during a divorce can be a complicated and frustrating matter. Let divorce Attorney Jean Mahserjian in Saratoga guide you through the process. The Law Office of Jean M. Mahserjian, Esq., P.C. cares about your situation and wants to help.
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