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Florida has long been a retirement haven. However, with the retirement of baby boomers and the end of the great recession, there is a tsunami of retirees coming to the sunshine state from northern climes. And with all those retirees comes what sociologists call the "grey divorce revolution", although that’s a topic all to itself which I’ve written on elsewhere in my website. In short, the fastest-growing segment in the divorce industry is spouses over age 50. The focus of my divorce practice is on divorcing spouses over 50.
Retirement benefits generally come in two forms: defined benefit plans and defined contribution plans. A defined benefit plan is what most people typically refer to as a traditional pension. This pension entitles the retired employee to a stream of payments during his or her lifetime and is calculated based upon the number of years of employment and highest years of pay. A defined contribution plan, on the other hand, is an account such as 401K, IRA or other tax-deferred account. Contributions are made to these accounts with pre-tax dollars and the accounts grow tax-free. Taxes aren’t due until the account holder withdraws funds, and an early withdrawal penalty applies to withdrawals before age 59 ½, with some exceptions.
The primary challenge in divorce cases is determining which retirement assets are marital and which aren’t. If a pension or 401K was earned entirely prior to the marriage, then it’s a non-marital asset, and the other spouse won’t be entitled to a portion of it. In many cases, spouses come into the marriage with an existing 401K or IRA and continue to contribute to that same account during the marriage. In that case, the retirement account has both a marital and non-marital component to it. The burden is on the owner spouse in a divorce action to prove the account balance on or around the date of marriage. Assuming that can be done, a financial expert can calculate growth and earnings in the account during the marriage to prove the present fair market value of the pre-marital balance. The contributions during the marriage are, of course, marital and will be split.
When a spouse earned a portion of his or her pension prior to the marriage and a portion during the marriage, a formula is used to distribute the pension between the divorcing spouses. In the divorce industry, it’s called the coverture fraction, which is the portion of the pension attributable to the marriage. It’s calculated by dividing the number of years the pensioner participated in the plan during the marriage by the total number of years that he or she participated altogether. If, for example, the pensioner worked for the employer a total of 30 years, but was only married for 12 of those years, then the coverture fraction would be 12 divided by 30, or 40%. In this situation, the non-employee spouse would be awarded half of the marital portion or 20% of the pension.
The good news is we can distribute pensions and other retirement accounts tax-free between divorcing spouses. The division of an IRA pursuant to a divorce judgment is a fairly simple process. It’s typically a matter of filling out some forms referred to as an IRA Rollover. As long as the funds go directly from one IRA account to another then it’s not a taxable event. As for pensions, 401K’s, and similar accounts, a qualified domestic relations order (or QDRO’s) must be entered by the court to distribute the benefits. Division of pensions via QDRO’s can be quite complex depending on the particular plan. A cottage industry of experts specializing in nothing but drafting QDRO’s has developed over the past 20 years.
If, for example, the employee spouse built up a pension or 401K at work during the marriage, then the non-employee spouse owns an equitable 50% interest in it under Florida’s equitable distribution law. The IRS does not consider the transfer of assets such as retirement benefits from spouse to the other as a taxable event. The reasoning is you shouldn’t have to pay taxes to receive something you already own.
Paul E. Rice, Jr., Esquire
Board Certified Divorce & Family Law