Dividing Pension & Retirement Benefits in a Divorce

How pensions are divided.

North Carolina divorce law states that any pension or retirement benefits, vested or non-vested, acquired during a marriage is considered marital property and subject to equitable distribution during divorce. To determine how much of a pension is subject to division, North Carolina family law uses a simple formula: Divide the length of time a spouse was simultaneously married (up to the date of legal separation) and employed by the total length of employment.

In other words, if a husband and wife are married for ten years, and the husband is employed by the same company for all 10 years, and his pension vests after 20 years of service, then one-half (10/20 years) of the pension is marital property. Accordingly, if the pension benefit is, for example, $1,000 per month, the marital part of the pension is $500 per month.

Normally, a spouse may not receive more than 50% of the marital portion of the other spouse’s pension, but North Carolina law does permit an award of more than 50% under certain conditions. These include cases where other marital assets are insufficient to effect an equitable distribution, the parties want to avoid dividing other assets tied to a business or professional practice, or the parties simply agree to another distribution.

The parties may opt to split the actual pension payments (once they begin), or the spouse receiving the pension may offer a lump-sum buyout to the other spouse. In those cases, the parties, an appraiser or the court must determine the pension’s value at the date of separation. Any expected pension benefits may also be factored into alimony and child support calculations.

Generally, a court must enter a qualified domestic relations order (QDRO) in order to establish an ex-spouse’s right to a portion of the other ex-spouse’s pension. The QDRO instructs the pension plan administrator to divide the benefits as specified in the order. This effectively makes the ex-spouse a co-beneficiary of the pension. This is important for tax purposes. Without a QDRO, all of the pension income is attributed to the employee-spouse. A QDRO makes the ex-spouse liable for taxes on her share of the distribution.

A QDRO should always be drafted by a competent attorney. Pensions are regulated by federal and state laws, and the QDRO must contain specific language to be effective. The terms of the QDRO should be worked out as early as possible in the divorce process because of the potential complexity.