Ex-Spouses, Pensions and Social Security
Divorce often becomes very expensive once the years of wedded bliss are ended. When married couples split up, their marital assets are fair game to be split as well. For the past 40 years, pension benefits have been protected by the Employee Retirement Security Act of 1974 — ERISA, a complex set of regulations that deal with workplace retirement plans. Then, in 1984, the Retirement Equity Act put spousal protections into place.
Accrued or vested retirement benefits are community property, and this means they are divided in a divorce. Retirement benefits that fall into the community benefit pool are military pensions, veterans' educational benefits, ERISA funds, IRAs, Keogh plans, employee stock option plans and 401(k)s.
Retirement benefits that are not classified as community property are Social Security payments, compensation for military injuries and worker's compensation disability awards.
There are two options for dividing retirement benefits: present-day valuation buy-out and division into two accounts. It may be advisable to hire a professional before making a decision. If you choose to divide a retirement account, you want to be sure that you don't lose any tax advantages.
You need to check how your state considers pensions in a divorce. Many believe that if the pension was earned during the marriage, the spouse is eligible to receive a percentage of it. If a court chooses, it can issue a domestic relations order that is taken up by the plan administrator, which notifies spouses when both can collect.
In some states, the balance on a 401(k) or IRA on the date of marriage is looked at as the earner's property and everything after that is subject to division.
The rules relating to any division at divorce are complicated and vary from state to state and retirement system to retirement system. Rights vary depending on when a divorce occurred —divorces that happened before pensions were considered marital assets or before retirement plan rules changed to permit direct payment to former spouses are treated differently than after the rules changed.
It is up to state divorce courts to decide whether and how pension assets are divided and whether survivors benefits are payable. Except for Social Security and Railroad Retirement benefits, a court order — the domestic relations order — is necessary for someone who has been divorced to get a share of a pension.
If a pension is divided between divorcing spouses, it must generally be done at the time of divorce, when other marital assets are divided. The court order or court-approved property settlement provides for a pension plan to make payments to a former spouse.
Finally, there's Social Security. In brief, for marriages that lasted 10 years or more, ex-spouses (husband or wife) have a choice of half of their ex's benefits or all of what they're entitled to on their own. However, remarried spouses have no claim on their ex's Social Security, unless the later marriage ends. In any event, the amount either party claims has no effect on what the other receives. As with many retirement benefit rules, it can get complicated, so be sure to work with a professional.