As always, prior to reading this post, please review my disclaimer by clicking on the link above, or by clicking on this link. Any legal principles discussed apply only to the Commonwealth of Virginia.
Introduction
In this day and age, saving up for retirement is a critical part of any person's career. When you get divorced, however, your retirement savings generally do not escape unscathed. After all, if your spouse has been staying at home to take care of the kids, allowing you to work and make substantial income, is it really fair for your spouse to get stuck with none of your retirement savings?
The law surrounding what happens to one's retirement in a divorce is very complicated. One blog post cannot possibly hope to capture the scope of this issue, but in this post, I hope to provide a basic outline of how retirement assets are handled in a divorce in Virginia.
Retirement Benefits Earned During Your Marriage are Marital Property - With One Big Exception
First of all, like all money earned while you are married, and property purchased with money earned while you are married, retirement benefits earned while you are married are marital property, and subject to division by a divorce court. There is one big exception to this, however, and that is Social Security benefits. Your Social Security benefits are always your separate property (this is by mandate of federal law), so a divorce court cannot touch your Social Security.
Now, you might already be thinking of some questions. How do I determine what benefits were and weren't earned during the marriage? What time period counts as "during the marriage"? How does a court determine how to divide those benefits? Moreover, since I can't touch my retirement until I'm a certain age, how does a court physically divide those assets?
The Basic Rules for Dividing Retirement Benefits
Well, first of all, the basic rules for dividing retirement benefits are laid out in the Code of Virginia - specifically Section 20-107.3(G)(1), where the Code states that "upon consideration of the [equitable distribution factors]... the court may direct payment of a percentage of the marital share of any [retirement account]... the court may only direct that payment be made as such benefits are payable. No such payment shall exceed 50 percent of the marital share of the cash benefits actually received by the party against whom such award is made. 'Marital share' means that portion of the total interest, the right to which was earned during the marriage and before the last separation of the parties, if at such time or thereafter at least one of the parties intended that the separation be permanent."
So, let's parse all of that out. The first part tells us that retirement assets are divided upon consideration of the equitable distribution factors listed in Section 20-107.3(E). So this tells us that the division of a retirement account is, generally, subject to the same rules as division of all other marital property - meaning there is no automatic 50/50 division of the property, rather the court must decide what is fair based on the list of factors.
The next part just tells us that the court can divide retirement accounts. After that, we see that the court cannot require those benefits to be paid until they are actually payable - so you can't face a penalty for having an early withdrawal from a 401(k) since the court cannot force you to make such an early withdrawal.
Next, we see a requirement that the non-owning spouse cannot be awarded more than 50% of the marital share of the benefit. This is an important difference between how retirement benefits and other marital property are divided. While the court may generally conclude that the 20-107.3(E) factors warrant your ex getting 65% of the marital property, the court cannot award your ex more than 50% of the marital share of your retirement account.
Note also that the rule does not restrict the other direction. In other words, if the court determines that the factors under 20-107.3(E) warrant your ex only getting 35% of the marital property, then the court also has the option to only award your ex 35% of the marital share of your retirement benefits.
Finally, the section tells us that the "marital share" of those benefits is the rights in the benefits that are earned between the date of marriage and the date of separation (not the date of divorce), so all benefits earned after the separation are your separate property.
How to Calculate the Marital Share
So, saying how the marital share is defined is one thing - actually calculating it is quite another. So, what does all the legal jargon about "that portion of the total interest, the right to which was earned during the marriage" actually mean? Well, it depends on what type of retirement account you are referring to.
There are two types of retirement accounts - defined contribution plans, and defined benefit plans. A defined contribution plan is a plan where you contribute certain amounts over time, and then, within certain rules, once you reach a certain age you withdraw what you want to withdraw. Examples of defined contribution plans are 401(k)'s, federal Thrift Savings Plans, and IRAs. A defined benefit plan is one where, upon certain conditions being met, you become entitled to certain regular payments for the rest of your life (or until a set time). Examples of defined benefit plans are your standard pensions, retirement annuities, federal FERS and CSRS benefits, and Virginia state VRS benefits.
For defined contribution plans, the marital share is all contributions made between the date of marriage and the date of separation, plus all earnings and losses attributable solely to those contributions.
For defined benefit plans, the marital share is usually defined by a formula. You take the total number of months (a) between the date of marriage and date of separation, and (b) where you were employed by the employer whose plan you are dividing, and then divide that by the total number of months you were employed by the employer whose plan you are dividing (both during and not during the marriage).
An example would be that if you began work for an employer with a defined benefit plan on January 1, 2010, got married on January 1, 2011, separated on January 1, 2012, and left that employer on January 1, 2013, your numerator would be 12 (total months you were employed during the marriage), and your denominator would be 36 (total months you were employed), for a fraction of 1/3.
Similarly, if you got married on January 1, 2010, began work for an employer with a defined benefit plan on January 1, 2011, separated on January 1, 2012, and left that employer on January 1, 2013, your numerator would be 12 (total months you were both employed and married), and your denominator would be 24 (total months you were employed), for a fraction of 1/2.
Once you get your fraction, you then multiply it by your periodic payments, to give you the portion of those payments that is marital. This is not the portion your spouse gets - it's just the portion that is marital. That is the portion that gets divided.
How do courts physically divide the retirements?
So, this probably sounds very complicated, especially if you have to do it yourself. Moreover, since the benefits can't be kicked in until you'd normally be eligible, you might be wondering if you have to keep this in mind for potentially decades, then meticulously calculate a division of each payment. Fortunately, you do not - rather, the Court will enter an order directing your retirement benefit administrator on how to divide your retirement assets. It is then on your administrator to make sure it is done properly.
A federal law called the Employee Retirement Income Security Act of 1974 (ERISA), which has been amended multiple times since 1974, creates a large number of protections for retirement accounts, and also provides the means of dividing most retirement accounts. ERISA creates a concept known as the "Qualified Domestic Relations Order" (QDRO, generally pronounced like "quad-row"). QDROs are universally recognized orders that, if they meet certain conditions, will require a retirement administrator anywhere in America to properly divide a retirement account.
For defined contribution retirement plans, the QDRO will lay out the relevant dates, and then require the plan administrator to calculate the marital share, divide the marital share, then take the other spouse's portion of the marital share and open a 401(k), IRA, or other equivalent account in that spouse's name with the funds. Once the new account has been created and the money removed from one and put in the other (known as the funds being "segregated"), the process is complete and you are back to having complete control of your account. No penalties are given for early withdrawals, taxes, etc.
For defined benefit plans, the QDRO will contain the formula mentioned above, and the plan administrator will retain that until the denominator is determined (since you may still be working at that employer when you divorce). Once the denominator is determined, the administrator will determine the share of funds your ex will be entitled to, and once you retire and start earning funds, the account administrator will divert your ex's share directly to your ex.
Note, however, that ERISA does not apply to federal employees. As a result, federal retirement plans are divided by what is known as a "Court Order Acceptable for Processing" (COAP). Rules for COAPs are put out by OPM on a routine basis. Note that TSPs and FERS/CSRS plans have different administrators, so you will need a separate order for division of a TSP and for division of a FERS/CSRS plan.
Finally, the State Department and military each have their own systems separate from the rest of the federal government. The military will divide military retired pay via an allotment, which can be done if the proper language is included in the Final Decree of Divorce itself. State Department retirement plans must be divided per State Department rules.
Conclusion
Remember how I said at the beginning of this post that retirement division is far too complicated a topic for one post? Then do you see how complicated this post was? Well, I stand by what I said at the beginning - this post is only a basic overview. Once you get into the details, it gets very muddy. If you are involved in a divorce and there are substantial retirement assets involved, I cannot strongly enough recommend that you get an attorney. If you would like to discuss your case with an attorney, please feel free to call (703)281-0134 or e-mail me at SLeven@thebaldwinlawfirm.com to set up a consultation. Our initial consultations are free for up to half an hour!
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