Pension Plans and Divorce
The Nest Egg and Divorce in Mississippi
Here is a common situation I see as a Mississippi divorce lawyer. A wife wants to divorce her husband. The husband works for a large employer in Madison, Mississippi and has accumulated a nice retirement account from the employer while married to his spouse. In fact, other than the house, the husband’s retirement account is the largest asset this couple owns. The wife wants to know if she is entitled to any of the retirement account. If so, can it be divided.
The answer to the first question depends on how the retirement account was earned. Generally, a retirement account that was accumulated during the marriage is marital property. The reasoning is that wages and benefits of employment earned during the marriage are marital property. That brings up the second question—how can the retirement account be divided?
Generally, private employer retirement accounts are controlled by federal law—the Employee Retirement Income Security Act (ERISA). ERISA normally applies to two types of private employer retirement accounts—a defined benefit pension plan and a defined contribution pension plan.
A defined benefit pension plan is one that promises to pay an employee a defined benefit (x dollars per month) once the employee has worked for a specific period of time and has reached a certain age. The amount of the benefit upon retirement usually involves a formula factoring in the number of years the employee worked for the employer and the employee’s salary. This is what most of us have seen with our grandparents who worked for the factory all their life. Once they retire, they receive a fixed amount per month for retirement. This type of pension plan is becoming less common.
By contrast, a defined contribution plan is one where the employee contributes pre-tax dollars to the plan with the employer usually matching the invested dollars to a specified level. The employee will be entitled to the employer’s contribution once they are vested in the plan (working a specific period of time). The value of the account fluctuates depending on the performance of the investments and the contributions. Examples of these plans are 401(k) plans and 403(b) plans. When the participant (employee) reaches a certain age, then they can start receiving the benefits of the plan. However, if they attempt to withdraw money early, they will suffer income tax penalties.
In my next post, I will discuss how the benefits under these two types plans can be divided in a divorce.
