Dividing Defined Contribution Plans

Posted on February 05, 2012 in General News

A defined contribution plan is an employer-sponsored retirement plan where the amount of the employer's annual contribution is specified and the employee can also elect to make contributions. 401(k) plans and profit-sharing plans are examples of definedcontribution plans.

In the context of a divorce, the Court may award the non-participant spouse up to 50% of the “marital share” of the participant’s defined contribution plan by QDRO. The awarded portion of the marital share may take the form of a specified dollar amount, a specified percentage of the account balance, or a fraction/percentage of the marital share defined as of a certain date. In addition, the non-participant spouse may be entitled to a portion of other economic improvements on the participant’s benefit, depending upon the features of the particular plan and what is ordered by the Court or agreed upon by the parties.

In the course of negotiating a settlement or preparing for trial, one issue to be considered is whether the non-participant spouse will request interest, gains, and losses on his or her award. If the non-participant spouse is awarded or given interest, gains, and losses, his or her awarded portion will be increased (or reduced, as the case may be), depending upon the market, from the date of the award (usually the date of separation) to the date the Administrator of the Plan distributes the award to the non-participant (i.e., typically by establishing a separate account for the non-participant). If the non-participant spouse is not awarded or given interest, gains, and losses, he or she will only receive his or her awarded portion. Obviously, whether a non-participant chooses to ask for interest, gains, and losses will depend upon the then-current posture of the market, and may represent a gamble since there is often a substantial delay between when the Court makes its equitable distribution award (or the parties sign a Settlement Agreement) and the administration of the QDRO (and, therefore, the division of the retirement benefits).