Issues With Retirement Plans In a Divorce

Loans against plans

Employers often allow employees to borrow against contributions that have been made to plans.

These borrowings are like any other secured liability: they serve to reduce the value of the assets and consequently the value of the marital estate. They are also subject to the same timing and valuation problems as any other liabilities.


As with virtually any other asset (or liability), when an item is obtained can mean the difference between having to share the asset with an ex-spouse or not. For example, a car owned prior to the marriage may be determined to be pre-marital and excluded from the marital estate.

The same is true for pension plans. Amounts deposited in an account prior to marriage (and sometimes after separation) can be determined to be non-marital and excluded from the marital estate.

There are numerous theories and calculations that have been developed to make these types of divisions. They can run the gamut of actually tracing all deposits and account earnings by period, to tracing the retirement work units credited by an employer by period. Dealing with the assorted methods devised to segregate the marital and non-marital portions of pension plans may be challenging, even for experts. Consequently, if one or both of the parties insist upon their use, then reliance on experts may be necessary. However, the use of time to divide pension amounts appears to be more commonly used than any other single method. The formula is straightforward:

Months of Marriage ÷ Months of Employment x Pension Amount = Marital Portion

For example, assume that the couple has been married for 64 months and the husband has been in his current position for eight years, or 94 months. Assume also that his IRA has a value of $26,000. The marital portion of the pension is $17,702 (64 ÷ 94 x 26,000). Assuming that the IRA is to be split equally, the wife would receive $8,851. This formula can also be applied to defined benefit pension plans.


The time an employee must remain in his or her position before becoming entitled to the provisions of a company pension plan is known as the vesting period.

The Employee Retirement Income Security Act of 1974 (ERISA) recognized that the Untied States workforce was mobile. That is, the days of lifetime employees were over, and employers were becoming unjustly enriched by extended vesting periods. For example, if an employee left before the five-year vesting period had been met, he or she would lose all benefits that had been accrued. The Act significantly shortened the vesting periods of defined benefit plans.

For marital estate valuation purposes, the issue was whether or not the benefits accrued prior to vesting should be included in the marital estate. For example, assume that a pensioner married when he was four years into a 7-year vesting period. The argument could be made that he was not entitled to receive the pension amounts when he was first married so, therefore, could not claim the amounts accumulated prior to the marriage as pre-marital and exclude them from division. The significant shortening vesting periods by ERISA has mitigated this issue. That is, since vesting periods are relatively short, the adjustments caused by their existence are normally minimal.

Another consideration under vesting is the accounting theory of accrual. The classic example is accounts receivable. These are amounts that are owed to a company for goods or services rendered. They are typically considered as assets in business valuations and, therefore, the division of marital estates. Their inclusion in the marital estate is made in spite of the fact that the amounts may not yet be due under the terms of sale.

The same theory can be applied to vesting. The amounts have been earned, but the employee is not yet entitled to receive them. Consequently, an argument for the exclusion of benefits earned prior to vesting may falter when compared to other economic or accounting theories. This is true especially when subsequent events (the employee becomes vested) prove that the amounts earned prior to vesting are part of an economic benefit that will be received in the future.