Characterizing Qualified Private Retirement Benefits – As we learned in our previous blog, the type of retirement plan one or both divorcing spouses participates in affects how the benefits associated with that retirement plan will be characterized, valued, and divided once the marriage is over.
Dividing property is not always an easy process, and the battle between what is yours and what is truly mine can get rather ugly. But luckily, the court has very specific rules it follows to help untangle the often jumbled web to help make sense of it all. Retirement benefits are no different in this regard.
Below is the link to last week’s blog. We suggest you read it before moving forward with this article, which answers the question of how courts go about characterizing qualified private retirement benefits.
Characterizing benefits in a Defined-Contribution Plan.
A Defined-Contribution Plan is a vehicle in which both the employee and employer contributes money or stock to an individual account held in the employee’s name. The contributions are usually based on a percentage of the employee’s salary while the value of the employee’s account will depend on the amount of contributions made, plan and income expenses, and the gains and losses of the account’s investments. The employee gets the full balance upon retirement.
Per the Texas Family Code, all benefits in a DCP (vested or nonvested) are presumed to be community property. It is up to the participant to prove separate interest (for example, contributions occurred before marriage).
Key note: DCP benefits can be either vested or nonvested. Vested means the participant is guaranteed to be paid the benefit regardless of future employment. Obviously, a nonvested benefit can be forfeited based on certain future events.
Characterizing benefits in a Defined-Benefit Plan
A Defined-Benefit Plan is slightly different in that an employer generally agrees to pay an employee a monthly defined benefit from the date of retirement until the employee dies. But the same principles hold true in that vested and nonvested benefits in a DBP can be characterized as either separate or community property.
A key note to consider: Many defined-benefit plans make adjustments to the participant’s benefits after a marriage is dissolved. There are two types of postdissolution suits – those that are attributable to the participant spouse’s continued work, and those that are not. Those that are not attributable can be characterized as community property.
Courts use two formulas to calculate the community-property interest in a defined-benefit plan, and which one they use depends on if the plan is fully matured or not.
This is used when the benefits are fully matured at the time of divorce. The interest is calculated by dividing the number of months the parties were married during employment by the total number of months the participant spouse was employed at the time of retirement. The resulting percentage represents the community estate’s interest in the retirement benefits.
This formula is used when the benefits are not fully matured. The interest is calculated by dividing the number of months the parties were married during employment by the total number of months the participant spouse was employed at the time of dissolution. The resulting percentage represents the community estate’s interest in the benefits.
We know that was probably a lot to digest all at once. If you have any questions, please contact our Nelson Law Group, P.C. office to let us know. We love hearing from our loyal readers.