Questions About Profit Sharing Plans and DivorceIf you have questions about profit sharing plans and how they are affected by divorce, the following information can help you understand how everything is handled. Belinda's Question: My divorce settlement says that I will receive 1/2 of my husband's retirement when he retires, and states a specific amount. It has only been a few months since the divorce was final, and he is about to lose this job. How can I ensure I will receive this money? It is a "profit sharing plan", that he didn't pay any money into. It is with a family-owned business. We live in Texas, this company is based in Chicago, IL. Timothy's Answer: A Profit Sharing Plan, also known as a defined contribution plan, is an agreement between employers and employees that allows employees to share in their employer's profits. In this type of program, your husband's employer has discretion to determine when and how much the company pays into the plan. The amount allocated to each individual account is usually based on the salary level of the participant (employee). At your husband's employer's discretion and when the company has a profitable year, his employer can make a contribution to each employee's profit-sharing account. These funds can then be used to invest in stocks, bonds or other investment vehicles on a tax-deferred basis. Most profit sharing plans contain a vesting schedule, often between three and six years, (some longer) during which time an employee becomes a full participant (fully vested) in the plan. If your husband lost his job or was to leave the company for any reason prior to him becoming fully vested, he would forfeit all or a portion of his plans accumulated value. Whether or not your husband keeps his job, if your divorce settlement stipulates that you are to receive one-half of his profit sharing account, you will still be entitled to half, providing your husband has met some or all of his vesting requirements. While you state your husband has not actually contributed any of his own funds to his plan, if his company has made contributions to his plan and he is partially or fully vested, then his profit sharing plan has some value. Profit sharing plans, unlike IRA's are considered "qualified plans" and hence fall under the guidelines of the Employee Retirement Income Securities Act of 1974 (ERISA.) The Employee Retirement Income Security Act is a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans. Over time important legislation has amended ERISA. The Retirement Equity Act of 1984 among other things, created spousal rights to pension benefits through qualified domestic relations orders (QDRO's) in the event of divorce. Today, the only way to divide your husband's profit sharing plan is with the use of a Qualified Domestic Relations Order. A 'QDRO' is a judgment, decree, or order that gives a pension plan participant access to retirement assets that must be used to pay an ex-spouse or dependent children. If you used an attorney for your divorce, he/she would have had this document prepared for you either in-house or by an outside expert. Many attorney's shy away from preparing QDRO's because often they are very complex and most people, attorneys included, do not fully understand them. If you used an attorney, you should speak to him or her to inquire about this. Your QDRO would have been filed with the court and you need this to get access to your one-half of your settlement. The fact that you live in Texas and his company is Chicago based does not matter. This would not have any affect on your settlement or your share of his profit sharing plan. You will want to establish a rollover IRA to receive your portion of the profit sharing settlement in order to avoid having to pay taxes and possibly a penalty if you take distributions before age 59½. However, under certain circumstances you can make distributions which may allow you to avoid the age-59½ penalty tax.
Related Articles: Timothy McNamara is a certified divorce financial analyst, specializing in the financial issues that couples and individuals face when their marriage ends. Having gone through a divorce himself, he is passionate about helping people understand and manage the complicated financial issues divorcing couples often face. This column is not intended to take the place of professional advice, but rather to provide financial information about the various issues that arise in a divorce. For specific recommendations concerning your situation, you should retain an experienced certified divorce financial analyst who can answer your questions based on the details of your case. WomansDivorce.com, Timothy McNamara, and Tracey Manzi disclaim any liability from any claim arising from any information contained in this column. This column is not a substitute for professional advice. Divorce
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