Division of Retirement Benefits in Divorce

The division of retirement accounts is of the most common issues faced by divorcing spouses. In many marriages, a single spouse accumulates a large nest egg through his or her employer. This account cannot be accessed before retirement age without incurring a significant tax penalty. How, then, can a retirement account be split during the divorce process?

Disposition of Retirement & Employment Benefits & Other Plans

The general rule is that the part of a spouse’s retirement benefits earned during the marriage constitutes community property and is subject to consideration in dividing the estate of the spouses on divorce. However, Social Security benefits are not divisible on divorce, and are exempt from the division of the community property, regardless of whether the benefits were earned or received during the marriage.

Texas Family Code Section 7.003 states: “In a decree of divorce or annulment, the court shall determine the rights of both spouses in a pension, retirement plan, annuity, individual retirement account, employee stock option plan, stock option, or other form of savings, bonus, profit-sharing, or other employer plan or financial plan of an employee or a participant, regardless of whether the person is self-employed, in the nature of compensation or savings.”

Two Types of Retirement Plans

Non-Private Plans

Governmental plans and church plans are governed by special statutes applicable to the particular plan. Municipal, Texas Teacher Retirement, Civil Service and Federal Employees’ Retirement Systems each have their own set of rules, statutes and regulations.

Special rules apply to the division of military retirement plans. Some military retirement benefits are subject to division and some are not. For example, Veterans Disability Benefits are not subject to division.

The Federal Railroad Retirement Act governs railroad retirement. The railroad retirement system provides two levels of benefits called “tiers.” Tier I is calculated using Social Security benefit formulas and includes earnings both in the railroad industry and in employment covered by the Social Security Act. Tier II is based on railroad earnings alone. Thus, Tier I benefits are not divisible on divorce, but Tier II benefits are. Some railroad union benefits are also divisible on divorce.

Private Plans

Private plans are governed by the Employment Retirement Income Security Act (ERISA), the Internal Revenue Code (IRC) or both.

Not only does the type of retirement plan matter, it also must be determined if the plan is a defined benefit, defined contribution, or a combination of both plans. The federal or state statutes applicable to the plan must be followed carefully.

A qualified domestic relations order or domestic relations order (QDRO or DRO) can be used to allow spouses to negotiate a fair division of retirement benefits without incurring the negative tax consequences associated with accessing retirement funds. QDROs allow spouses to designate an alternate payee on a pension or retirement plan. This alternate payee gains ownership rights over a portion or the entirety of the account.

Dividing retirement benefits can be very complicated, especially in high asset cases. Tim Whitten is a Board Certified Family Law Specialist with ample experience in dividing assets in divorce. Call us at (512) 790-5066 or contact us today for a consultation.