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Dividing Cash Balance Retirement Accounts Upon Divorce

Many of my clients are surprised to find out that the client’s cash balance retirement account, that the client has worked hard for many years to build up, can be a form of “marital property”.  My client will say to me, “You mean to tell me that he/she has a right to a part of my 401(k)/403(b)/IRA/other cash balance retirement account?”  It is true.  For most people getting divorced who have a vested interest in a cash balance retirement account, the account, or a part of it, is marital property that the divorce court judge can divide between parties.

In fact, in most cases, a retirement account is usually the single most valuable marital asset (or a close second, after the marital home).

Whennest egg dollar sign 401k icon I say “divide” I mean, literally, that the divorce court judge will issue an order, usually called a “Domestic Relations Order” (DRO) or “Qualified Domestic Relations Order” (QDRO), and that order will tell the retirement account plan administrator to give a “piece” of the retirement account to the other party.  (DRO’s and QDRO’s are beyond the scope of this blog post.  Maybe I will do a blog post on those issues in the future.)

“Marital property” is property that a Colorado divorce court judge can divide and allocate between the two persons getting divorced.

“Separate property”, on the other hand, is NOT property of the marriage.  The divorce court judge has no authority to divide separate property between the parties.  Separate property belongs solely to the party who owns it.

(An overview of when an asset is “marital property” and when it is “separate property”, and how to prove it, may be a topic for a blog post in the future.  For the time being, just understand that a divorce court judge can only divide and allocate property that the judge determines to be “marital” property.)

Let’s step back for a second and define what a “cash balance” retirement account is.  In general (and there are exceptions), there are two basic kinds of retirement assets:  “Defined benefit” and “cash balance”.

Cash balance retirement assets include assets such as 401(k) accounts, IRA’s, 403(b) accounts, and others.  These accounts have a “cash balance” (hence the name) and the value can go up and/or down over time. Sometimes a cash balance retirement asset is referred to as a “defined contribution” retirement asset.

A “defined benefit” retirement asset, on the other hand, is a more traditional form of retirement asset.  The most common defined benefit retirement asset is the classic “pension” you may receive upon retiring from a job.  Traditional pensions are being offered by fewer and fewer employers.  They do still exist, however, for some workers.  Government and military pensions (for example, the Colorado PERA defined benefit pension) and labor union pensions are two examples of defined benefit retirement assets.

(A defined benefit retirement asset is harder to value and divide.  How a court values and divides a defined benefit retirement asset will be the subject of a future blog post.)

But, to get back to our discussion of how to value and divide a cash balance retirement account:  Can a cash balance retirement asset be marital property?  As we already determined, yes.  Is all of it marital property?  Lawyer answer:  It depends.

In general (again, there are exceptions), the money in the cash balance retirement account that ACCRUED DURING THE MARRIAGE is marital property that can be divided by the divorce court judge.  What does that mean?  It is easiest to explain using an example:woman ann icon 128 by 128

Let’s say that there is a person named Ann.  Ann starts working for an employer on January 1, 1990.  The employer offers a 401(k) retirement account and Ann takes advantage of it.  She and her employer put money into the 401(k) account.  That increases its value.  In addition, the account is invested in stocks, bonds, mutual funds, et cetera, and the value of the account goes up because the value of the assets it is invested in goes up.

All well and good.

On man bert 128 by 128January 1, 2000, Ann marries Bert.

Ann and Bert stay married for over 17 years.  In January 2017, Ann files for divorce from Bert.  The anticipated day of the divorce decree is the day of the permanent orders hearing:  October 1, 2017.  Ann is still working for the same employer and anticipates working for this employer for a few more years before retiring.

Ann goes to a divorce lawyer and the two discuss her desires concerning how to divide the marital assets.  To Ann’s surprise, the lawyer brings up the issue of her 401(k).  The lawyer informs Ann that a part of her 401(k) is a marital asset that must be divided, or at least given a value and accounted for, upon divorce.

The lawyer explains how the marital portion of the 401(k) is identified and valued.  Except for a few rare situations, the part of the 4lawyer icon 128 by 12801(k)’s value that accrued prior to the date of the marriage, is separate property.  This is the sole and separate property of Ann and cannot be divided by the divorce court judge.  (The separate property can be considered, for other purposes, such as determining how much alimony to award, by the divorce court judge.  That, again, is the topic of a possible future blog post.)

The part of the 401(k)’s value that accrued AFTER the date of the marriage is MARITAL property.  THAT part of the 401(k)’s value can be divided between the parties by the divorce court judge.

To put some easy numbers on this example, let’s say that, as of December 31, 1999 (the day before the parties were married), the value of Ann’s 401(k) account was $100,000.  That $100,000 is Ann’s separate property.  That $100,000 cannot be divided by the divorce court judge.

(How do you prove that the value was $100,000 on December 31, 1999?  Sadly, it requires a lot of digging by Ann.  She needs to call the plan administrator and get them to dig up the old statements for the account from 1999 and 2000 to show the value of the account as of the date of the marriage.)

Now, let’s say that, upon the date of divorce (October 1, 2017, in our example), the value of Ann’s 401(k) account is $300,000.  That $200,000 increase in value that occurred during the marriage is MARITAL property.  That part of the 401(k) can, and usually will, be divided between the parties by the divorce court judge using a DRO or QDRO order.

How much of the $200,000 in marital 401(k) money does Bert get?  That depends on the facts of the case.  Colorado is an “equitable distribution” law state, meaning the divorce court judge has broad power to divide marital property so that it is divided fairly and EQUITABLY.  That DOES NOT necessarily mean divided equally.

As a general rule, Colorado divorce court judges like to start with the assumption that the total amount of the marital property will be divided equally, unless one of the parties shows the judge a good reason why it should not be divided equally.  That is where a good divorce lawyer comes in to help you:  To make the argument for not dividing property equally, if that is what the client wants to do.

A Colorado divorce court judge will not usually care so much about whether EACH asset is divided equally.  A Colorado divorce court judge will usually care more about whether the TOTAL value of ALL of the martial assets (the dollar figure you get when you add up all of the marital assets), is divided equally (or roughly equally).  To arrive at the result of each party getting about one half of the TOTAL amount of assets might require giving ALL of one asset, like a house or a car, to one party, while giving ALL of another asset, such as a 401(k) account, to the other party.

But, for our example, let’s assume the divorce court judge wants to divide the marital portion of  Ann’s 401(k) in half and give one half of the marital portion to Bert.  How does the divorce court judge do that?  He or she issues an order saying that is how the property will be divided.  He or she will then issue a separate order, called a DRO or QDRO, to implement that decision.

judge icon female 128 pixels(Actually, the devil is always in the details.  In addition to issuing an order as to how the 401(k) account will be split, the judge will order the PARTIES to hire a special professional, known as QDRO expert, to draft a proposed DRO or QDRO for the judge to review and sign.  The parties will then take the DRO or QDRO drafted by the expert and submit it to the judge.  The judge will review it and then issue the DRO or QDRO order.  THEN one of party’s lawyers, usually the lawyer for the party who had the retirement account in the first place, will submit the judge’s DRO or QDRO, as ordered, to the “plan administrator” (usually a bank, insurance company, or some sort of retirement money investment firm) who manages the retirement account.  The lawyer will request that the plan administrator follow the judge’s orders and implement the DRO or QDRO.)

When the retirement account plan administrator implements the DRO or QDRO, usually a NEW retirement account asset will be created.  For our example, this is a new 401(k) account.  The portion of Ann’s 401(k) account that was allocated to Bert will be placed in Bert’s shiny, new 401(k) account.  The remaining money will be left in Ann’s 401(k) account.

So how much does Bert get?  In our example, he would get a new 401(k) account with $100,000 in it.  That is one half of the marital amount of $200,000.  Ann would get a 401(k) account with $200,000 in it.  She gets her original, pre-marital, separate property of $100,000.  She also gets HER HALF of the MARITAL part of the 401(k) account.  Since the marital part of the 401(k) account was $200,000, she gets one half, or $100,000.  Adding $100,000 and $100,000 together gives Ann a total of $200,000 in her post-divorce 401(k) account.

Just so there is no confusion, if Bert has cash balance retirement assets, those assets are identified, valued, and divided in exactly the same way as Ann’s cash balance retirement assets.

Whew!  This is just one tiny slice of the body of tedious legal and practical knowledge that an effective divorce attorney has to understand, analyze, and then implement to get a great outcome for his or her clients.  Be kind to your divorce attorney:  He or she is working hard for you!

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  1. Pingback: Pensions, Divorce, and the "Hunt" Formula - The Law Office of Brock R. Wood, LLC

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