A divorce can be a stressful ordeal for all parties involved. It can also have a major impact on your financial status, particularly if you and your spouse accumulated substantial marital property over the course of your marriage. From real estate property to retirement plans, anything that was obtained, earned or contributed to during the marriage is considered an asset of the marriage. In New Jersey, marital assets are divided between you and your spouse fairly and equitably. In most cases, a pension that is earned over the course of your marriage is subject to division during the divorce, with the exception of the pension that was earned prior to the marriage. If you are going through a divorce, and you have questions about the marital assets that you are entitled to, do not hesitate to contact a skilled divorce lawyer at your earliest convenience.
What Is a Pension?
A pension plan is an employer-sponsored retirement plan that provides a monthly income after you retire from your job. Unlike a 401K plan, which employees contribute to each month with a portion of their paycheck, a pension is generally funded by the employer. Upon retirement, the money that you have accrued is divided into monthly checks. The amount you will receive is based on a number of factors, including your age, compensation and years of service to the company or organization. Pension plans and other retirement accounts are often one of the biggest assets in a divorce. They often have more value than the family home. The most common types of pension plans include a defined-benefit plan and a defined-contribution plan. There is also a pay-as-you-go pension plan, which is less common than the other two. The following provides a general description of each:
- Defined-benefit plan: With this plan, the money that you will receive upon retirement will be specified up front, regardless of how the investment pool performs. The amount of money that you will receive if you retire early will be determined by a vesting schedule. While the benefit of this type of plan is that you know how much you will receive and your employer makes the payments, you do not have control over the amount that is accrued, and you will receive the same amount per check for the rest of your life.
- Defined-contribution plan: In this type of plan, the employee contributes a certain amount, which is often matched by the employer. The benefit depends on the investment performance. The most common example of a defined-contribution plan is a 401K.
- Pay-as-you-go plan: This is set up by the employer but funded by the employee through paycheck deductions or lump sum contributions. There is no employer match program in pay-as-you-go. The most common example of this plan is Social Security.
What Are the Different Vesting Schedules for Pensions?
Pension plans follow a set of rules that control how much money companies may invest each year in investment funds for employee pensions. These rules have been established by the United States Department of Labor. Pensions benefits follow either a cliff vesting schedule or a graded vesting schedule.
- Cliff vesting schedule: This schedule allows you to receive 100 percent of the earned benefit at a certain year. For example, if you have a five-year cliff vesting schedule, and you leave your job before your fifth year, you will not be eligible to collect any money. However, if you leave after your fifth year, you will receive 100 percent of the money that you are entitled to based on the pension formula.
- Graded vesting schedule: With a graded vesting schedule, you are entitled to a larger percentage of the earned benefit the longer you work for the company or organization. For example, if you have a seven-year graded vesting schedule, you may be ineligible to collect benefits for the first two years. You may collect 20 percent in the third year, 40 percent during the fourth year, 60 percent during the fifth year and 80 percent during the sixth year. At the seven-year mark, you can collect 100 percent of the benefit. If you retire early, you may be able to collect a lump sum for the pension that you have earned. Depending on the circumstances, you may have to wait until retirement before you can access the funds. If this is the case, you will need to contact the company when you retire in order to set up your annuity. In addition, you may have to pay a penalty for early distribution.
Am I Entitled to My Spouse’s Pension in the Divorce Settlement?
Pensions are usually considered joint marital property, which means they are subject to the equitable distribution of property. If you were married for a considerable amount of time, and the pension accumulated a significant amount of money, you are eligible for a percentage of that income. While some states divide the marital property equally, where each spouse gets 50 percent of the assets, New Jersey is an equitable distribution state, which means that the assets – including the pension – are divided fairly based on what the court deems reasonable. If your spouse was enrolled in a defined-benefit plan for ten years before you got married, you are not entitled to those benefits as it is considered separate property, or property that your spouse acquired before or outside the marriage.
If the entire pension if considered marital property, there are number of factors that need to be considered when distributing the property during a divorce, including:
- Details of the plan: It is important that you understand the details of the pension, how the benefits will be distributed, and whether you have the option of receiving monthly payments or a lump sum payment. Make sure that you have a thorough understanding of these details before negotiating a property settlement.
- How the pension is calculated: There are two options when it comes to handling a pension in a divorce. You and your spouse can share the monthly annuity payments during retirement, or you can divide the present value of the pension during the divorce settlement. The formulas used to determine these amounts can be complicated, so it is highly recommended that you consult with an experienced divorce lawyer who can assist you with this process.
- Qualified domestic relations order (QDRO): If you believe you are entitled to a percentage of your spouse’s pension as part of the divorce settlement, you must obtain a qualified domestic relations order (QDRO) that will be submitted to the pension plan administrator. This document notifies the plan administrator about how and when the pension should be divided. It is important that this step is not overlooked, since it is done after the divorce has been finalized.
- Tax implications: In most cases, property transfers are tax-free if they are “incident to divorce.” However, different assets have different tax implications, so even if there are two assets that have similar value, the value could be significantly different once the taxes are applied. It is important to take the anticipated tax burden into consideration when negotiating an equitable property split because the tax applies when the monthly benefit is paid during retirement.
How Do I Receive a Pension Payout After a Divorce?
According to the Employee Retirement Income Security Act of 1974 (ERISA), pensions are considered qualified investments, which are distributed in accordance with a QDRO. This directs your spouse’s employer to distribute the percentage of the pension to you after the divorce. If you and your spouse cannot reach an agreement, a family judge will decide the percentage of the pension payout. The signed QDRO will be sent to the holder of the pension so that the funds can be paid to each spouse at the appropriate time. If you do not want to wait until the pension vests in order to be paid your share of the pension, you may take the following steps:
- Determine the value of your spouse’s equitable share in the pension.
- Agree that you will receive another asset that has the same value as the pensions. For example, if you want to maintain possession of the house, you may want to consider waiving your right to your spouse’s pension. However, before making this decision, discuss your options with your divorce lawyer to make sure that you will benefit financially from the decision.
Bridgewater Divorce Lawyers at Lyons & Associates, P.C. Negotiate the Best Possible Settlement for Our Clients
If you and your spouse are going through a divorce, our experienced Bridgewater divorce lawyers at Lyons & Associates, P.C., can help. We will walk you through every step of the settlement process, address any questions you may have and ensure that you receive the best possible outcome. To schedule a free, confidential consultation, call us today at 908-575-9777 or contact us online. Our offices are located in Somerville and Morristown, New Jersey, where we serve clients throughout the state, including, but not limited to those residing in Bedminster, Parsippany, Rockaway, Short Hills, Chatham, Randolph, Madison, Morris Plains, Bridgewater, Woodbridge, Basking Ridge, Mendham, Morristown, South Plainfield, Somerset, across Somerset County, Morris County, Union County and throughout New Jersey.