Experts in Retirement Plan Valuation and Characterization near El Toro

Retirement plans fall into two main categories: defined contribution plans and defined benefit plans. If a plan or part of a plan was earned during the marriage, that part will be characterized by the family law courts as community property. There may be issues as to when a retirement plan, or a portion of a retirement plan was earned. The determination of which part of a plan is community property will be determined by case law and will relate to the date of separation.  The earnings, accumulations and losses relative to the community interest in a plan will be characterized as community property. Depending on the type of plan, a Qualified Domestic Relations Order (QDRO) may be required to distribute the non-employee’s share of a plan to him or her without tax consequences. The QDRO is prepared by an attorney who specializes in this area of the law.  If the plan is a defined benefit plan that is to be valued, the valuation is completed by an actuary.  The benefits and/or assets in retirement plans are pre-tax and that fact is relevant as to how the community share of the plan fits into the overall settlement structure.

California family law courts characterize and value retirement plans in a divorce based upon these and other factors depending on the details of each specific plan:

  • type of plan
  • increase in plan value during the marriage
  • contributions to the plan during the marriage
  • specific contractual terms of the plan
  • performance of plan assets
  • age of the employee
  • years of employment before and after the marriage
  • first possible retirement date
  • survivorship options

California family law courts generally allocate retirement plan benefits between separate property and community property according to when the benefits were earned.  Benefits "earned" during the marriage (after the date of marriage and before the date of separation) are generally characterized as community property.  Benefits "earned" before the date of marriage or after the date of separation are generally characterized as separate property.

Defined Benefit Plans

Defined Benefit Plans are plans that generally provide for specific benefits, commencing at a specific age or date that are payable for a defined period of time (e.g. $6,000 per month, commencing at age 55, and payable until death). This type of plan is valued by an actuary who calculates the present value of the future stream of payments using various assumptions and tables. The assets of the plan are not relevant to the value of the community interest in the plan.

Non-Military Defined Benefit Plans are generally allocated between community property and separate property using what is commonly described as the “time rule.”

A traditional pension plan is a Defined Benefit Plan. The terms of a Defined Benefit Plan define the "benefit."

Military pensions are allocated using the frozen benefit method. The community interest is fixed as of the date of the court order and is calculated as if the service member had retired on that day.

Example: Time Rule Applied to Non-Military Defined Benefit Plan:

Plan Benefits at Date of Marriage:

$1,000 per month-based on 10 years of pre-marriage employment by wife.

Plan Benefits at Date of Separation:

$3,000 per month-based on 20 years of employment (10 years before marriage and 10 years during marriage).  In simple terms, husband's share of the community interest equals 25% of the total benefit (50% of the 10 years worked during the marriage or 25% of the total 20 years).

Plan Benefits 10 Years After Marriage:

If the wife works an additional 10 years after the date of separation, she would have total employment of 30 years. If her benefits after 30 years totaled $6,000 per month, the husband’s percentage of the total benefits would decrease to 16.67% (5 years ÷ 30 years) but his actual benefit would increase to $1,000 per month from $750 per month (based on the increase in total monthly benefit payment).

Defined Contribution Plan

A Defined Contribution Plan is a plan that allows for a specific dollar contribution to be made into the plan annually. The plan functions somewhat like a savings account. Examples of these plans would include 401(k), IRA, SEP IRA and a profit sharing plan. The value of these plans is reflected on the employee's current plan statement. An actuary is not used for the valuation. The money contributed into these accounts, after the date of the marriage and before the date of separation (and the earnings and losses on those contributions until division) is generally characterized as community property. Gains or losses on community assets in a plan, generally take on the character of the underlying assets, regardless of when the gains or losses occur.

The terms of a Defined Contribution Plan define the "contributions" that can be made.

If during the marriage, the employed spouse (wife) contributed $2,000 to the plan, and the earnings on the $2,000 equaled $800, then the community property interest would equal $2,800. The separate property interest would be $10,000 plus earnings on the $10,000 of $3,200 for a total of $13,200.

If you are in need of an expert who specializes in retirement plan valuation and characterization near El Toro, contact Minyard Morris Family Law at (949) 724-1111 to set up a consultation.

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