Retirement Plans

All increases in retirement plans that accrue beginning from the date of marriage to the date of separation is community property.  The amount of money in these retirement plans can be significant.

If you are going through a divorce or legal separation and you or your spouse have money in a retirement plan, it will most likely have to be divided.  Retirement plans are often one of the most significant asset that should be addressed and divided during divorce.

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Types of Retirement Plans

You may have more than one retirement plan.  Retirement plans can be any one of the following or a combination of the following plans:

• Individual Retirement Arrangements (IRAs)
• Roth IRAs
• 401(k) Plans
• Roth 401(k)
• 403(b) Plans
• SIMPLE IRA Plans (Savings Incentive Match Plans for Employees)
• SEP Plans (Simplified Employee Pension)
• SARSEP Plans (Salary Reduction Simplified Employee Pension)
• Payroll Deduction IRAs
• Profit-Sharing Plans
• Defined Benefit Plans
• Money Purchase Plans
• Employee Stock Ownership Plans (ESOPs)
• Governmental Plans
• 457 Plans
• 409A Nonqualified Deferred Compensation Plans
• CalPERS
• CalSTRS

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Dividing Retirement Plans

IRAs are divided using a process known as “transfer incident to divorce,” while 403(b) and qualified plans, such as a 401(k), are split under the “Qualified Domestic Relations Order” (QDRO).  Many courts confuse this distinction by labeling both types of divisions as QDROs. Nevertheless, you and your spouse need to delineate clearly the category into which each of your retirement assets falls when you submit your information to the judge so they are listed correctly in the divorce or separation agreement.

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Transfer Incident to Divorce

If you specified that your IRA division is to be treated as a transfer incident to divorce in your agreement, no tax will be assessed on the separation transaction.  The movement of funds may be classified as either a transfer or a rollover by the IRA custodian, depending on the circumstances of the division and how the decree is worded.  The recipient will take legal ownership of the assets when the transfer is complete and then assume sole total responsibility for the tax consequences of any future transactions or distributions.  This means that if you are going to give half of your IRA to your soon-to-be-ex-wife in the form of a properly labeled transfer incident, she will have to pay the tax on any distributions she takes out of the account after she receives the funds.  You will not owe tax on the assets that were sent to her because you followed the IRS rules for transfer incidents.

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Tax Consequences

If, however, you failed to adequately label your division as such, you will owe both tax and an early withdrawal penalty, if applicable, on the entire amount that your ex-spouse received.  In order to avoid this, be sure to clearly list both the division percentage breakdown and the dollar amount of IRA assets being transferred, as well as all the sending and receiving account numbers for all of the IRAs involved in the transfer.

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Tax Returns

The instructions that you provide need to satisfy both the sending and receiving IRA custodians.  If the division agreement is not approved by the courts, the IRS will require you to file an amended tax return that reports the entire amount you sent to your ex as ordinary income.  Furthermore, the balance your ex received cannot be placed in an IRA because it was not an eligible transfer;  this means he or she will lose the benefit of tax deferral on that money – and may come back to you to be compensated for that loss.

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Tracking Basis of IRA Assets

Some qualified transfer incidents are made from an IRA that has been partially funded with nondeductible contributions.  If this is the case with you, then both you and your ex will need to know the dollar amount of nondeductible contributions and file tax Form 8606 with the IRS in order to correctly calculate and report the apportionment of the nondeductible amounts.  Do not hesitate to seek professional help in getting this form filed for both of you;  trying to determine the correct amount can be tricky.  Neither of you wants to pay unnecessary taxes on IRA distributions that came from contributions that were never deducted.

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Qualified Domestic Relations Order

Divorce constitutes one of the few exceptions to the protections from seizure or attachment by creditors or lawsuits that federal law accords to qualified retirement plans.  Divorce and separation decrees allow the attachment of qualified-plan assets by the ex-spouse of the plan owner if the spouse uses a Qualified Domestic Relations Order.  This decree is used to divide qualified-retirement–plan assets between the owner and his or her current or ex-spouse or child or other dependent.

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Tax Free Transfers

QDROs resemble transfers incident to divorce in that they are tax-free transactions as long as they have been reported correctly to the courts and the IRA custodians.  The receiving spouse may roll QDRO assets into his or her own qualified plan or into a traditional or Roth IRA (in which case the transfer will be taxed as a conversion but not penalized).  Any transfer from a qualified plan pursuant to a divorce settlement that is not deemed a QDRO by the IRS is subject to tax and penalty.

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Gillmore Rights

Gillmore Rights allow the former non-employee spouse to start receiving their share of benefits in the former employee spouse’s pension should they want to continue working after their retirement date. The former non-employee former spouse has the ability to receive their interest in community property at the earliest date on which the former employee spouse would be eligible to retire, regardless of whether the former employee spouse actually retires at that time. This option to commence benefits at the earliest retirement date is governed by federal law 29 USC §1056(d)(3)(E)(i); Internal Revenue Code §414(p)(4); and a California court case Marriage of Gillmore (1981) 29 C3d 418.

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The Gillmore Election

A “Gillmore Election” occurs when a former non-employee spouse makes a motion in court to demand payment of benefits from the plan or the participants.  The “Gillmore election is irrevocable which means that if the former non-employee spouse commences receiving benefits before the former employee spouse actually retires, the former non-employee spouse will not be entitled to share in any future benefit increases due to the former employee spouse’s continued service, increased age, or increased salary.  The former non-employee spouse will still be entitled to cost-of-living adjustments.

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Waiver of Gillmore Rights

It is possible for parties to waive Gillmore rights explicitly as part of a divorce proceedings.  The parties should be aware that retirement benefits can be divided by using the Time Rule Formula or by a Separation of Account.  Should they choose the Time Rule Formula, this can be construed as an implicit waiver of Gillmore rights, unless the Domestic Retirement Order states otherwise. CalPERS, CalSTRS, and other government plans require language in their Domestic Relations Orders stating that payments to the former non-employee spouse will not commence until the member actually retires and begins receiving payments.  This is with regard to the plan and payments made directly by the plan only; a non-employee spouse could still seek court action against the former employee spouse requesting payments directly from the still-working former employee spouse.

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CalPERS Retirement Plans

CalPERS offers a defined benefit plan where retirement benefits are based on a formula, rather than contributions and earnings to a savings plan.  Retirement benefits are calculated based on a member’s years of service credit, age at retirement, and final compensation (average salary for a defined period of employment).

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CalPERS Retirement Plan Formulas

CalPERS formulas vary depending on classification (e.g., miscellaneous, safety, industrial, or peace officer/firefighter);  membership category (e.g., state, school, or public agency employer);  and, the specific provisions in the contract between your agency and CalPERS.

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CalPERS Disability & Industrial Disability Retirement

This is for employees who can no longer perform the usual duties of their current position due to illness or injury.  Industrial disability retirement for safety members, or members whose agency contracts for this benefit, who are unable to perform the usual duties of their current position due to a job-related illness or injury.

If you were an employee who has an injury or illness that prevents you from performing your job duties,  you may be eligible for disability retirement.  The cause of disability doesn’t need to be related to their employment.  If your disability is the result of a job-related illness or injury, and you are a local or state safety member, state peace officer/firefighter, state industrial member, state patrol member, or local miscellaneous member whose employer contracts for this benefit, you may be entitled to an industrial disability retirement.

You should apply for your retirement as soon as you believe you are unable to perform your job due to a disability expected to be permanent or last longer than six months.  An employer may also file on behalf of the employee.

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CalPERS Service Retirement

This is what most often is considered the “normal” retirement plan.  Service retirement is a lifetime benefit.  In most cases, you can retire as early as age 50 with five years of service credit.  If you became a member on or after January 1, 2013, hyou must be at least 52 years old to retire.  All state agencies, including California State University and school employers, are treated as a single employer under the Public Employees’ Pension Reform Act (PEPRA).  Public agencies are required to contribute a percentage of the total member payroll as determined by an actuarial valuation.  If the new contract requires a local system transfer, your agency must pay a one-time administrative fee of $2,100.  Your agency must meet the definition of a “public agency” as defined in the California Public Employees’ Retirement Law (Sections 20056-20057).

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For more information on retirement plans, click on one of the following links:

Former Spouse Retirement Plan

Community Property Asset

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Legal Separation

CalPERS

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