What Types of Employer Retirement Accounts Are Divided in Connecticut Divorces?
You’re wondering what types of employer retirement accounts CT courts can divorce during divorce, and we are happy to explain. Retirement accounts are one of the major property types that Connecticut divorce courts divide.
Remember, the most common misconception out there is that Connecticut provides property 50/50 in divorces. In fact, CT doesn’t have any default rule that courts must divide property 50/50.
Connecticut is an “equitable distribution” and an “all property” state. “Equitable” does not mean equal, or even half, but rather what the Superior Court considers fair. “All property” means that the courts have jurisdiction over all the property that both spouses have, marital and separate.
Types of Employer Retirement Accounts Divided in Connecticut Divorces
There are three main categories of employer retirement plans that Connecticut divorce courts divide are:
- Defined Contribution Plans
- Defined Benefit Plans (Pensions)
- Stock Ownership Plans
Defined Contribution Plans
A defined contribution plan is an employer-sponsored plan that generally requires you to put in your own money.
Common defined contribution plans include 401(k) Plans, 401(b) Plans, and Profit Sharing Plans. Usually, both employer and employee both make contributions to an account. When an employee leaves the company or retires he or she has the option to withdraw the entire balance (typically via a rollover to an IRA or a new employer’s plan).
Valuing a Defined Contribution Plan in a Divorce
During the divorce, defined contribution plans are relatively easy to value because the value is the current account balance as of a certain date. The nuance is usually in deciding what date to use. A defined contribution plan’s value may fluctuate dramatically after a couple separates but before they divorce. This is especially true depending on market conditions and how they’ve invested it.
Defined Benefit Plans (Most Commonly Pensions)
Today, very few companies provide a traditional defined benefit pension to employees. However, virtually all city, State of Connecticut, and federal employees are currently eligible for a defined benefit pension.
Defined benefit plans, typically pensions or cash balance plans, are retirement accounts for which your employer contributes all the money and promises you a defined monthly income when you retire. Sometimes your employer will enroll you on day 1 of your job. Other employers have a waiting period. Defined benefit plans generally require that you work in a position for several years before you are “vested” or able to receive pension benefits. Here is one 5 to 10-year vesting example from the Connecticut State Employees Retirement System.
There are two differences between a pension versus a cash balance plan. The first is in how the benefits are calculated; in a pension, it’s based on a formula based upon how long you were on the job and your average salary during your last few years of employment. A cash balance plan essentially credits your account with a set percentage of your salary each year.
The second significant difference is that if you leave the employer before retirement age, you may take the contents of your cash balance plan out and roll them into an IRA.
Valuing a Defined Benefit Plan (Most Commonly a Pension) in a Divorce
We shared that defined contribution plans like 401(k)s and 403(b)s are relatively easy to value because their value is the current account balance as of a certain date. Pensions are often more difficult to split because they represent a future commitment of the employer.
Stock Ownership Plans
Another type of retirement benefit is an employee stock ownership plan (ESOP). Stock ownership plans are similar to defined contribution plans. The main difference with these plans is that the contributions are in the form of company stock. The valuation of stock ownership plans during the divorce process is broken down similar to the valuation of pension plans. Publicly traded stock information is reported daily and corporations are required to value their stock annually. Spouses may decide to split their stock ownership plan with a Qualified Domestic Relations Order (QDRO), which will dictate how the benefits will be divided as part of the divorce property division.
Other Types of Accounts
Stocks, Stock Options, and RSUs
There are other stock benefits that people receive through their workplace, such as stocks, stock options, and restricted stock units. Although not technically retirement accounts, these assets are subject to division in a divorce. Uncovering these assets and determining the best way to split them can be tricky.
Restricted Stock Units, (“RSUs”) are shares of stock that typically do not become available until the employee is vested with the company, which could be three years or longer. Stock options, restricted stock, and employment benefits often have payout specifications and may not be accessible until several years after the divorce is finalized. It all depends on the particulars of the specific RSU plan. Additionally, accessing the assets could result in significant tax implications.
An example of another type of unique retirement plan that does not fall under any of the above categories is a deferred compensation plan. Within this type of plan the employee is allowed to defer a portion of his or her gross income to a retirement plan. Taxes are due when proceeds are distributed, so that is big consideration here as well.
The Comprehensive Connecticut Property Division Guide
How to divide property is one of the most important issues in divorces. And, it’s one of the most confusing. There are no set formulas or rules on how property will be divided. The good news is that creates tremendous flexibility for experienced divorce attorneys to craft an individualized approach. In order to prepare to make solid and informed decisions, you need to understand how property division works. Our Comprehensive Connecticut Property Division Guide tells you everything you need to know about property division in Connecticut.
Now that you have learned more about the types of employer retirement accounts that can be divided in Connecticut divorces, you may want to learn more about the factors that Connecticut courts consider when dividing retirement accounts.
Or, now that you have more information about the types of employer retirement accounts that can be divided in Connecticut, you know that it isn’t simple. Make sure your divorce counsel is experienced with complex assets and takes the time necessary to ensure you understand all the issues so that you can make smart decisions. There is a lot of opportunity for creative negotiations, strategy, and solutions.
Our first step at Freed Marcroft, the Goals & Planning Conference, is designed to get to the heart of your problem and unveil your true goals. Then, we take those goals along with the facts of your case and analyze them so that we can present you with recommendations and options on how to move forward.