WHAT HAPPENS TO RETIREMENT ACCOUNTS AFTER DIVORCE?
Every divorce requires property division. Property division can be accomplished by either a court-approved settlement or a court decision after trial. Unlike child custody or alimony, property division cannot be revisited or modified by the court after it has been ordered. Property is divided immediately by a court order, and ex-spouses generally move on with their separate lives. However, the division of property includes retirement plans and pension plans, the effects of which last for decades after the divorce is finalized. Below is an overview of how the court divides retirement accounts in a divorce.
Divorce Property Division in Kansas
Kansas state law allows a court to divide all property in a divorce, not just property acquired during the marriage. Kansas uses the “equitable distribution” process for dividing property. Some states use the “community property” process, where all property is split evenly (50/50) in the divorce. In equitable distribution states, like Kansas, the court will divide the property fairly, not necessarily 50/50. In deciding how to divide the property fairly, the court considers the ten factors set out in § 23-2802(c). This list of factors includes the length of the marriage, the parties' ages, and other aspects of the divorce.
Since all property is up for grabs in a divorce in Kansas, courts will also consider the manner and means of acquiring property, specifically whether the property is classified as marital or non-marital. Marital property is all property acquired during the marriage; non-marital property is all other property, including property given directly to one spouse as a gift or inheritance, even if provided during the marriage. When dividing property, Kansas carefully recognizes the contributions of non-working spouses to marital property and assets. One spouse may forego a career to raise children or take care of the marital home, so Kansas does not punish this spouse by preventing him or her from collecting property. Therefore, Kansas divides all property, not just marital property.
Types of Retirement Accounts and how they are divided in a Divorce
It is essential to know how family law treats retirement accounts before discussing how and why retirement plans are divided in a divorce. There are generally two categories that courts divide all retirement and pension accounts into: defined-contribution plans and defined-benefit plans. For defined-contribution plans, the employee-spouse makes monthly contributions that are invested. A third-party, known as a trustee, traditionally controls these investments. These plans have the potential to generate significant income over time, but the amount paid is entirely fluid. The spouses will have an estimate and hopes for what the account will produce, but the amount will remain uncertain until the time of payment. Common examples of these types of plans include profit-sharing plans such as 401(k)s, money purchase plans, and stock bonus plans.
Defined-benefit plans are a more conservative type of retirement plan because the amount to be paid out is known from the onset. No gamble comes with a defined-contribution plan. The defined-benefit plan pays a monthly benefit to the employee-spouse from retirement until death. The amount of the monthly benefit is based on a set formula. These plans are generally funded through a life annuity for the employee-spouse. Still, some companies may offer a one-time lump-sum payment instead of monthly payments, or even a survivorship option for the spouse. Rather than being based on monthly contributions from the employee-spouse, these plans generally require only service time.
Dividing Retirement Accounts during a Divorce
A retirement account can be divided in a divorce, even if it was started before a marriage and contributed solely by one spouse. While these factors may affect how the retirement accounts are divided, it is rare for the court to deny either spouse any future interest in the benefits. The court cannot simply split the account, so dividing a retirement account may seem difficult. However, the court may use a Qualified Domestic Relations Order to assign benefits to the nonemployee spouse. This order is required if the retirement plan is defined as a “qualified retirement plan” for federal tax purposes. Generally, this includes both benefit-defined and contribution-defined plans. If the plan does not fall into the qualified retirement plan category, then a Domestic Relations Order is used instead. Once either one of these orders is in place, the benefits are transferred to a new account and held for the nonemployee spouse.
The court must know the plan's value so it can fairly divide the plan's interests and potential benefits between the spouses. Therefore, each spouse is required to submit an estimate of the retirement account's value to the court. However, this is difficult to do with contribution-defined plans, since they are inherently a gamble. The court can use several methods and tools to predict value to the best of its ability, but if it is wrong, there is no available remedy. If the court assigns a value that is too high or too low, the spouses will have to live with the consequences. Courts will not reopen a property division after a final order, so the spouses are left to the whims of the market thereafter.
Second only to the marital home, retirement accounts are often one of the most significant assets to be divided in a divorce. Dividing these accounts can quickly become aggressive and challenging, as they are valuable. An experienced attorney is better equipped to navigate the complexities of dividing retirement accounts. Experienced counsel is a worthwhile investment when dividing retirement accounts, as a fair division ensures that spouses are not required to restart their retirement savings after the divorce.