Retirement Plan Valuation and Characterization

Two Basic Types of Retirement Plans
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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 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 by a divorce court 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 by a divorce court 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 income 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, 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 divorce 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 divorce 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 by divorce courts.

Defined Benefit Plans

Example: Time Rule Applied to a Non-Military Defined Benefit Plan
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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 by the divorce courts using the frozen benefit method. The community interest is fixed as of the date of the divorce court order and is calculated as if the service member had retired on that day.

Defined Contribution Plan

Example: Allocation Between Community Property and Separate Property
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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, profit sharing plan, etc. 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 (or separate) 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.

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