Many divorcing couples are surprised to find that their collective retirement benefits are often worth more than their home and other assets. As a result, if you’re going through a divorce, you need an attorney who understands the complexities of determining the value of retirement benefits, and who will fight to ensure that you receive the full value to which you are entitled.
Illinois courts cannot divide all retirement accounts between spouses; instead, they can only allocate marital property. However, this begs the question: what portion of a retirement account or pension is marital property?
If an individual pays into a retirement account during a marriage, such paid-in amounts are typically considered marital property. Consequently, they may be subject to division in a divorce.
As a Rockford retirement benefits division lawyer, if you are concerned about how divorce may impact your retirement accounts, pensions, or other retirement benefits and keeping or getting your fair share, I invite you to call my office today to schedule a free consultation to learn more about your legal options.
In Illinois, retirement benefit plans generally fall into one of two categories: defined contribution plans (such as 401k plans) and defined benefit plans (such as pension plans).
A defined contribution plan (DCP) consists of a plan where both the employee and employer may make plan contributions, and these contributions are then invested into assets (usually stocks and mutual funds). At retirement, the employee is entitled to begin withdrawing funds from this plan (which usually happens as stocks, mutual funds, or other equities are sold).
Contributions to these plans are usually made on a pre-tax basis, so that when distributions are made, taxes are due. One plan exception is a Roth 401(k) plan, in which contributions are made on an after-tax basis, but these plans are not usually offered by employers. Ultimately, the value of the DCP will be dependent upon how much is invested and how well the plan investments have performed.
A defined benefit plan (DBP), on the other hand, specifies a formula for determining payouts to be made to an employee at retirement. The value of this plan is not tied to the value of the performance of any assets (such as stock) but rather is “defined” by the formula in the plan (which is usually tied to the number of years that an employee has worked for a company, the employee’s age at retirement, and the employee’s earnings with the company).
As an example, the percentage of the maximum income to which an employee may be entitled is often tied to the sum of the age of the employee at retirement and the number of years that the employee has with the company. For example, if an employee is 65 at retirement and has worked for a company for 30 years, this total would be 95. A pension plan might provide that if this total is 85 or more, the employee is entitled to 100% of the pension benefit.
The pension benefit, in turn, is often a percentage of the employee’s salary at retirement, such as 80%. If an employee’s salary at employment is $100,000 and the employee is eligible for 100% of the pension benefit based upon their age and years of service with the company, the employee would be entitled to a pension of $80,000/year.
Of the two main types of retirement plans, defined contribution plans (like 401k plans) are the easiest to value, as participants are generally provided with quarterly statements that reflect the exact value of a participant’s plan assets at a specific time (although there are vesting issues which may need to be considered).
Defined benefit plans (such as pension plans) are more complicated to value as payout terms and conditions vary, as the value of a pension plan will increase (often significantly) the more years that an employee works for a company and the higher the salary that is paid to the employee.
We can help with actuarial and financial components of plan valuation. With pension plans, valuation can be somewhat complex, as many assumptions must be made about the duration of employment and salary.
The difficult aspect of dividing retirement benefits is that while a value can be determined for the retirement benefits, the fact is that neither spouse is usually entitled to receive any retirement payments until a future date. Thus, if the retirement benefits are currently worth $50,000, it is not the case that each party simply receives a check for $25,000.
We can help you come up with a settlement or litigation strategy which equitably considers and divides up the marital portion of any retirement benefits you are entitled to. There are a couple of different strategies which are often employed.
If the couple has other assets comparable to the value of the retirement benefits at issue, an “offsetting award” approach can be employed. For instance, if the equity in a couple’s home and furniture is of approximately the same value as the marital portion of the pension, one spouse could be awarded the home and furnishings, and the other spouse awarded the full value of the pension.
Unfortunately, this “offsetting award” approach often does not work because there are insufficient other assets comprising the marital estate or because the marital portion of one spouse’s retirement benefits is disproportionately large. In such cases, the Court can order the benefits of one of the spouse’s pension plans to be divided and paid to each spouse through what is referred to as Qualified Domestic Relations Orders (“QDROs”), or Qualified Illinois Domestic Relations Orders (“QILDROs”), as applicable. Under these orders, each spouse becomes entitled to a specified amount or percentage of the retirement benefits at some later date (typically upon retirement of the spouse named in the retirement plan).
Illinois categorizes pension plans as part of the marital estate, so an individual may have a right to a portion of their spouse’s pension, regardless of whether he or she ever contributed throughout the marriage. Consequently, any financial contributions made to a pension while a couple was married may be subject to property division.
With a paid consultation, I can more specifically address your concerns specifically once I learn about the nature of retirement accounts at stake, although likely more information will be needed to make an exact assessment (such as a copy of the retirement plans).
Dividing retirement accounts, such as an IRA, 401(k), defined-benefit pension plan, or another retirement account, can be challenging. As an experienced divorce and retirement division lawyer who has served Rockford and the surrounding communities for years, Attorney James Teeter Jr. can provide pragmatic advice and guidance to simplify the asset division process and ensure retirement accounts are divided as fairly as possible. Call today to schedule a no-obligation consultation to get started!
We can handle all of the property division aspects of your divorce. If you would like to read more now, click on any of the following links: