Chicago Illinois Retirement

Like other assets, retirement plans are divided based upon the retirement benefits earned during the course of the marriage. Because retirement benefits involve payments in the future, the values must be discounted to present value. Alternately, the parties can enter into a Qualified Domestic Relations Order which provides for a division of the retirement monies at retirement.

Common Types of Retirement Benefits Divided in Divorce Cases

The divorce practitioner must be knowledgeable in a multitude of areas to competently handle any case. The financial arena shelters a multitude of minefields for all of us, and few of them are as treacherous as the valuation and division of retirement benefits. Since these benefits are often the largest asset a divorcing couple must divide, careful planning is required. In order to be prepared to handle these matters with enough skill to assure your clients of receipt of all benefits due them as well as a just proportion of those benefits, one must begin with a full knowledge and understanding of the many differing types of benefit plans available.

Differentiating between the two types of plans

• DEFINED CONTRIBUTION PLANS
  Two different types of plans exist in the mainstream of retirement benefit plans: DEFINED CONTRIBUTION PLANS and DEFINED BENEFIT PLANS. Defined Contribution Plans (DCPs) are the types of plans where the Participant, or employee, has their own "Account Balance", even if the funds are not segregated into separate accounts for each employee. The general fund is valued at least annually and the Participant receives a statement of his/her interest in that plan. Thus, it is relatively easy to obtain an exact value of the Participant's interest in these plans. When the participant leaves the employ of the company, plan balances may be transferred to the new company's similarly styled plan, to an IRA or other such instrument of the individual or the funds may be withdrawn and paid to the individual. If the individual chooses to withdraw his/her funds before reaching age 62 ¸, the funds withdrawn are taxed at ordinary income rates AND in addition, a 10% penalty (of the entire sum withdrawn) for early withdrawal is added to the taxes paid as an incentive to keep your funds in a retirement account. Examples of types of DCPs are: Profit Sharing Plans, stock Bonus Plans, Money-Purchase Pension Plans, Thrift Plans, Savings Plans, Cash and Deferred Salary Reduction Plans, 401(k) Plans and Employee Stock Ownership Plans (referred to as ESOPs).
  
  Defined Contribution Plans may be divided by using Qualified Domestic Relations Orders and transferring the non-participant's interest into that person's own IRA or account balance at their own employer equivalent plan. While Defined Contribution Plans are not required to provide Qualified Joint and Survivor Annuities or Qualified Pre-Retirement Survivor Annuities, securing the non-participant's interest up until the date the funds are transferred from the Participant's account to the non-participant's account is crucial. The method of providing this type of protection can be found in the sample QDRO in this issue of the Family Advocate prepared by Wayne S. Jacobsen, an ERISA practitioner in Newport Beach, California.

• DEFINED BENEFIT PLANS
  DEFINED BENEFIT PLANS (DBPs) with the emphasis on "BENEFIT" are more difficult to value. These plans refer to a Future Stream of Payments, based upon a BENEFIT FORMULA, as opposed to a calculable account balance, and, although funded by employer contributions calculated by the Plan's actuarial calculations, do not begin paying out until the employee or former employee retires. Typically, these plans take the average earnings of the Participant Employee over his/her last 5 years of service with the company and multiply that sum by the years of service put in by the employee and certain other factors to arrive at a monthly stream of payments to be paid to the Employee Participant upon his/her retirement. The Employee Participant may have a variety of payout methods to select from, including payments made over a single life (i.e. for as long as the former employee lives); a joint and survivor annuity (for as long as the former employee lives and, independent of the former employee's life, for as long as the joint annuitant lives); a 10 year guaranteed payment etc. Each of the choices offered will affect the monthly annuity paid. A Joint and Survivor Annuity, because it is to be paid over the risk of 2 lifetimes will necessarily be a lesser sum than a single life annuity. Under the Retirement Equity Act of 1984 (REA), both ERISA and the Internal Revenue Code were amended to provide that Qualified Retirement Benefit Plans (such plans include: Defined Benefit Plans, Money Purchase Plans and Target Benefit Plans) must pay certain benefits to a married plan participant and his/her spouse. If the participant dies BEFORE retiring, this benefit is called a Qualified Pre-Retirement Survivor Annuity (QPSA), and if the participant dies AFTER retiring, the benefit is called a Qualified Joint Survivor Annuity (QJSA). These benefits are crucial to secure when dividing Defined Benefit Plan interests when representing the non-participant spouse. Not including surviving spouse language in a Domestic Relations Order would be putting the non-Participant spouse's interest at risk of loss and would be tantamount to malpractice.