What are the federal laws around retirement benefits?

When divorcing parties in Virginia have retirement benefits that must be distributed, Virginia courts will determine the extent to which the benefits constitute marital property that is distributable in the divorce. However, the actual division of those retirement benefits may be dictated by federal law. This circumstance exists because, in Virginia, a court may only award a party part of the value of a marital asset unless that asset is titled in the names of both parties, and retirement assets are held in the name of only one person. The federal laws permitting the actual distribution of certain retirement assets between parties were enacted to protect the retirement asset interests of spouses of persons who participate in retirement programs that are subject to these federal laws. Different laws address different types of retirement plans, such as those offered by private sector employers; those offered by governments; those offered by the military; and private retirement savings accounts such as IRAs. If you are facing divorce and have questions regarding the division in divorce of retirement plans or assets that accumulated during your marriage, the attorneys at Culin, Sharp, Autry & Day P.L.C. are here to assist you.

Employee Retirement Income Security Act

The Employee Retirement Income Security Act, commonly known as ERISA, sets minimum standards for employers in the private sector participating who offer retirement plans that are protected by this body of law. Enacted in 1974, ERISA covers two types of retirement plans: defined benefit plans and defined contribution plans.

In a defined benefit plan, a participating employee receives a monthly benefit amount when they reach retirement age. This benefit is calculated using a formula identified in the plan contract documents. The benefit calculation formula typically accounts for years of service and salary during the employee’s tenure. A defined benefit plan is generally funded by an employer, though some plans also allow employee contributions. Pensions are the most common type of defined benefit plan.

In contrast, a defined contribution plan usually is a lump sum amount that the participating employee may draw down upon or annuitize when they reach retirement age. A defined contribution plan accrues value via contributions made by deduction from the employee’s paycheck, not to exceed a certain total amount each calendar year. Many defined contribution plans also provide for the employer to match the employee contributions up to a certain amount. The contributions are made to a larger fund, which is in turn invested and managed by the plan administrator or their designee. These funds may be invested in stocks, bonds, real estate, or other investment vehicles. Many plans permit the employee to designate how their funds will be invested in the available investment vehicles under the plan. Each employee may experience gains or losses on their invested funds. Under certain circumstances, employees may borrow from their defined contribution plans or make emergency withdrawals. 401(K) and 403(b) plans are among the most common types of defined contribution plans.

Federal Employees Retirement System

The private sector retirement plans governed by ERISA are not the only retirement plans controlled by federal law. Federal employees and military members have their own retirement structures established and governed by federal law.

Also known as FERS, the Federal Employees Retirement System was created by Congress in 1986 to ensure that Federal government employees have retirement benefits. It replaced the Civil Service Retirement System (CSRS), which was established in 1920 and is still in place for its remaining participants. Under FERS, benefits can come from three sources:

Basic Benefit Plan

Withheld from an employee’s paycheck, a Basic Benefit Plan will pay out a monthly pension when the employee retires. The Benefit Plan is held by the federal government, so if you quit working for the government agency, contributions will cease on the Basic Benefit Plan. The good news? An employee can still access benefits upon retirement.

Social Security

Automatically withheld from an employee’s paycheck, social security provides income to retirees as early as age 62. The age at which full benefits are available to each person who qualifies for them is defined by their birth year as set out in the Social Security Administration full retirement age definitions. Most persons of working age at this time will qualify for full retirement at age sixty-seven and a half.

Thrift Savings Plan

A Thrift Savings Plan, or TSP, is a tax-deferred account in which an employing agency will deposit a percentage of the employee’s basic pay for the pay period. The percentage of the deposit varies depending upon the year in which the employee began or rejoined federal service. In some circumstances, employees can also make additional contributions. The TSP is portable, meaning that the employee retains ownership of the TSP even if they leave the employment of the federal government prior to retirement. Employees no longer serving with the federal government cannot make additional contributions to their TSP, however.

State and local government employees will have retirement benefits that are established under state and local law as authorized by federal law. The nature and extent of these retirement plans will be similar to those available at the federal level, but each should be reviewed by counsel experienced in evaluating and dividing retirement assets in divorce matters in order to advise you of your interests in them in the event of a divorce.

Military Retirement Benefits

Retirement plans for military members are governed by different federal laws than retirement benefits for civilians. The nature and extent of the benefits the manner in which they are divided are dependent upon a number of factors, including the year in which the military member joined the service; the branch in which they served; the duration of the marriage; and whether or not they later transitioned to the Reserves or engaged in National Guard service. Military retirement assets can include defined benefit and defined contribution assets.

How are Retirement Funds Divided in a Divorce?

When marital assets include retirement funds, those funds may be allocated between the spouses. The allocation is effected by a domestic relations order that must be approved by the plan administrator. Domestic relations orders that effect division of retirement assets are called by different names by the different federal statutes. For example, ERISA allows the division of private sector retirement plans via domestic relations orders, referred to as Qualified Domestic Relations Orders (QDROs). Orders dividing federal employee retirement benefits are called Court Orders Acceptable for Processing (COAPs). Military retirement assets are divided by a Military Retired Pay Division Order. For a former spouse to access marital retirement funds awarded to them, one of these specialized domestic relations orders must be both entered by a court and approved by the plan administrator. These orders may also be used to order the payment of child support, spousal support (alimony) in addition to the distribution of marital property.

Protecting Retirement Assets in the Event of a Divorce

Retirement assets should be preserved pending the divorce to the greatest extent possible. If you are facing a divorce in which retirement assets are at issue, it may be possible to prohibit the spouse participating in a retirement plan from taking loans out against the retirement asset or otherwise depleting its value. Whether retirement assets of divorcing parties are from private sector, government, or military employment, their division requires the attention of experienced counsel to effect proper distribution under the laws and plan documents governing each type of retirement assets.

Virginia Divorce Attorneys Dedicated to Protecting and Dividing Retirement Benefits

With over 25 years of experience assisting high-net-worth clients, our legal team is ready to serve you. Contact the attorneys at Culin, Sharp, Autry & Day P.L.C. online or by phone to learn more.