Retirement assets are divided in a straightforward manner in Virginia divorces, and the division varies based on the type of asset. The most common type of retirement is a “defined contribution” plan – an account that you and/or your employer will pay into, and that carries a balance, like a 401(k), IRA, 403(b), Thrift Savings Plan, etc. By statute in Virginia, a court may not award more than 50% of the marital share of these accounts to a non-owning spouse. The first task, then, is to define the “marital share.” Generally, the marital share consists of all contributions made to the plan from the date of marriage to the date of final separation.
If you bring a defined contribution plan into the marriage, the balance at the date of marriage is considered separate, as well as all market growth on that balance. Additionally, contributions made after the date of final separation, and market growth on those contributions, are considered separate. To use an example, suppose a wife has a 401(k) with a balance of $25,000 at the time of marriage. During the marriage, the wife and her employer make contributions of $50,000. Due to market activity, the 401(k) is worth $100,000 at the time the parties divorce. It is relatively easy with available software to determine how much of that $100,000 is attributable to the $25,000 separate portion, and how much is attributable to the $50,000 marital portion. Assuming the $25,000 separate portion has grown to $35,000, the marital portion would be $65,000. If the marital portion were split equally, the non-owning spouse would be entitled to a transfer of $35,000 from the owning spouse’s retirement.
These transfers are done at or around the time of divorce, and sometimes require a separate court order that is sent to the plan administrator to effect. The transferred portion is generally rolled into an IRA in the non-owning spouse’s name.
The second type of retirement is a “defined benefit plan,” essentially a pension. These plans may carry a balance, but are paid out in the form of monthly payments upon retirement eligibility. These plans are also divisible. In these plans, rather than looking at contributions, we look at creditable service towards the plan. For example, assume that at the time of marriage, the husband had served 2 creditable years towards the pension. During the marriage and prior to separation, he serves an additional 10 years. To be eligible to draw upon the pension, the husband must serve 20 years total. After separation, the husband serves the final 8 years required to obtain the pension.
As with defined contribution plans, the court may not award more than 50% of the marital share. In a defined benefit situation, the marital share is determined by applying the “coverture fraction.” The numerator of the fraction is the number of creditable years served during the marriage before final separation, and the denominator is the total number of years served. So in our example, the coverture fraction looks like this:
Years served during the marriage (10)
———————————————
Total years served (20) → 50%
Therefore, 50% of each monthly payment received is marital. The non-owning spouse would receive up to half of that, or 25% of each monthly payment received, “if, as, and when” received by the owning spouse. If upon retirement, the pension pays the husband $1,500 per month, then $750 would be marital, and the wife would receive $375 per month. The husband would receive the rest.
Defined benefit plans generally need to be divided by a Qualified Domestic Relations Order, or QDRO. These QDROs can be quite complex and must be drafted by a qualified attorney to ensure that the coverture fraction is correctly applied, and that all plan terms are addressed by the QDRO. For example, if the pension has a survivor annuity, that issue should be addressed: Will the non-owning spouse receive some or all of the annuity? Is there a cost? How should the cost be apportioned?
Mistakes in retirement division can be costly, but are avoidable with appropriate legal guidance.
