Pension, Divorce and the Defined Contribution Plan
Key Points
  • Defined contribution pension plans are tax deferred savings plans usually set up by the company to provide income at retirement.
  • When negotiating a divorce, if you and your spouse are splitting a defined contribution pension, the alternate payee, could receive a lump sum payment.
  • If the alternate payee receives a lump sum payment he or she can avoid significant penalties, can be 20% or more, by rolling over the money into an IRA or other similar retirement plan.

This is a private tax deferred savings plan set up by a company or individual that will provide an income to a participant upon retirement:

Examples: Any Thrift Savings Plan, Profit Sharing Plan, Employee Stock Ownership Plan sponsored by a company, or John Doe IRA Account #123456

Benefits may be distributed in a lump-sum payment to the Alternate Payee immediately following qualification of the Order, when the Participant actually retires or at any other time as permitted by the plan.

Some Key Facts to Remember:

Once the plan distributes the lump sum payment to the Alternate Payee, the Alternate Payee must roll over the money into an IRA Account or another similar entity or he/she could be assessed a significant penalty. (Could be 20% or more!)

Suggested Reading
Pension Issues in Divorce Pension Issues in Divorce
When couples get divorced they must decide how to divide their property. Retirement benefits (pensions) often form a substantial part of the parties' total marital estate and many times are the largest single marital asset afforded the couple. Similar to other assets, pensions are typically divisible in cases of divorce to the extent that they are acquired during the period of marriage.

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QDROs – The distribution of a pension normally requires a QDRO, which is a Qualified Domestic Relations Order that establishes the terms and conditions of payment to both the worker-spouse and his survivor or former spouse.

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