Clients often want to know how their pensions get divided in a divorce. By pension we often encompass the terms defined contribution and defined benefit plan, so there’s two different types of plans. A defined contribution plan is a plan where you put money in to the plan, like a 401k. A defined benefit plan is more like a traditional pension where your employer contributes based on your years of service and salary. Your benefit at the end is not really defined now but it’s determined when you’re eligible to retire.
There are some nuances that put wrinkles in those plans, such as disability, which really can impact the distribution of a defined benefit plan toward the end. Those plans are often the police and fire pensions, state employee pensions, and other types of plans like that. You need special court orders to divide pensions and treat them as a non-taxable rollover. For qualified plans such as a 401k with a private employer, you would use a Qualified Domestic Relations Order (QDRO). Those plans are divided based on the portion that was acquired during the marriage, so you would look at what was in the plan, date of marriage, and what was in the plan as of date of filing of complaint, which is the most common division date for retirement assets. That would be treated as a non-taxable rollover once you have the specialized court order, or QDRO.
Defined contribution plans are treated a little bit differently. You would look at the end number and apply what they call the coverture fraction, which is the years married as the numerator, the total years in service as the denominator, and you would multiply that by 50% to determine what percentage your spouse gets when you’re eligible to retire.
The area of disability with defined benefit plans is really very ill-formed in New Jersey. The appellate courts have held that it might be reasonable to simply return the portion of the pension contributed by the plan participant but that’s an area that needs advocacy and further clarification.
The law firm of Paris P. Eliades Law Firm LLC is composed of experienced divorce and family law attorneys. Please contact our office in Sparta, NJ for a free initial consultation and get any questions answered regarding your divorce.