Family

Family law deals with matters of significant impact on family relationships, particularly adoption, divorce, custody, and abuse.

The Division of Retirement Benefits in a Divorce: The Defined Benefit Plan and The Defined Contribution Plan

The Division of Defined Benefit Plans and The Defined Contribution PlansAccording to Texas law, retirement benefits are classified as community property. Since retirement plans are viewed as indirect compensation to a spouse, they are viewed as income earned. Such income is subject to a “just and right” division upon divorce. Benefits contributed by the employee and the company during the marriage are viewed as community property and are included in this division. . In contrast, contributions to retirement accounts by the employee and the company prior to marriage are considered separate property.

The Employee Retirement Income Security Act (ERISA) does not allow for a participating employee’s benefits to be assigned away. Yet a carefully drafted Qualified Domestic Relations Order (QDRO) works with the ERISA guidelines to ensure that the provisions for child support, as well as other payment or marital property rights to the former spouse and dependents are not in violation of the aforementioned rule.

It is integral to understand the type of retirement plan in terms of laying out a QDRO. Oftentimes, calculating the division of the benefits can be confusing because such retirement plans have different allowances. For instance, there are some key differences between a Defined Benefit Plan and a Defined Contribution plan.

A defined benefit plan falls under the realm of ERISA as well as the Internal Revenue Code. These statutes require continuous funding of the plan. It provides a certain amount of benefits that are fixed for an employee once that person reaches the projected date of retirement. These benefits will continue for the participant’s lifetime. Such benefits are determined by factoring in the employee’s estimated years of employment as well as the final average compensation.

Another type of defined benefit plan is the cash balance pension plan. It provides each participating employee with an account that allows contributions typically based on years of employment or age. This type of account functions similarly to a defined contribution plan.

However, the difference between the cash balance plan and a defined contribution plan is that the former places much of the risk on the employer as opposed to the participant. Types of defined contribution plans include: profit sharing plans, section 401(k) plans, stock bonus plans, employee stock ownership plans (ESOPs), thrift plans and retirement savings. Like the cash balance plan, the defined contribution plan allows for contributions towards individual accounts. Contributions may stem from the participant, the employer, or both. Usually, the employee shall receive the account balance, as well as investment gains/losses, and any accrued interest once the participant retires or leaves the company. Payment is generally distributed as a lump sump, or in the form of a single-life annuity.

It is important to note that understanding the type of retirement benefits available as well as the law is integral in making key decisions. However, please contact a licensed attorney for assistance in drafting a QDRO.