Legal Rights Regarding Pensions/401(k)s After Divorce in Vermont

by Mary Jane Freeman Google
In Vermont, 401(k) plans are distributed equitably in divorce.

In Vermont, 401(k) plans are distributed equitably in divorce.

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Retirement plans, such as pensions and 401(k) plans, are often a person's most prized asset. Not only do they represent many years of hard work, they are also a symbol of financial security for the later years in life. When couples divorce, this prized asset is up for division just like other marital property, such as homes and cars. In Vermont, how much that split will be depends largely on when you acquired your retirement account, its balance, and the distribution allocation the court considers fair and just under the circumstances.

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Retirement Plans and Marital Property

When spouses divorce, the court must divide the couple's marital property. In Vermont, marital property is property the spouses acquired after they married. Regardless of who acquired the property, marital property is considered the joint property of both spouses. In contrast, separate property is anything the spouses individually acquired before getting married or received by inheritance or gift during the marriage. Vermont, like many states, also considers pension and 401(k) benefits marital property because, as articulated in the Vermont case of McDermott v. McDermott, these benefits are "received in lieu of higher compensation, which would otherwise have enhanced either marital assets or the marital standard of living." Since Vermont courts only have the authority to divide marital property in divorce, any retirement benefits earned before the marriage are off limits.

Equitable Distribution

Vermont is an equitable distribution state, which means the court will divide marital property, including your pension or 401(k), in a manner that is fair and just, based on your marital and individual circumstances. As a result, the property division in your case may be 50/50 or an unequal distribution like 60/40 or 70/30. To decide which allocation is best, the court will evaluate several factors, including the length of the marriage, the spouses' income, job skills and employability, contributions each spouse made to the marriage and marital property, age and health of each spouse, and any other factor the court deems relevant. If the court decides your spouse is entitled to a share of your retirement account, it has two options. It may leave your pension or 401(k) intact and award your spouse the equivalent amount in marital property, or it may establish an order authorizing payment from the account.

Qualified Domestic Relations Order

If the court decides to authorize withdrawal from your retirement account, it will create a Qualified Domestic Relations Order, or QDRO, which is a court order that specifically recognizes a non-participant spouse's right to receive payment from a participant spouse's pension or 401(k). Since retirement plans have different procedures, it is important to contact the plan administrator to ensure the QDRO is drafted according to the plan's requirements. It is not uncommon for attorneys in a divorce case to draft QDROs for the judge's signature. Once the QDRO is drafted, it is delivered to the plan administrator for review. Upon approval, the non-participant's right to payment is officially authorized.

Timing of Payments

Although your spouse may be authorized to receive payment from your pension or 401(k), that doesn't mean that the payment will automatically go to your spouse. Rules of your retirement plan determine when payment may be made. Some retirement accounts are very flexible in this regard. For example, 401(k) plans allow immediate withdrawals once there is a QDRO on record. It is common for non-participant spouses to rollover these funds into their personal retirement accounts. In the case of certain other retirement plans, this is not possible. As a result, non-participant spouses must instead wait until the participant spouse retires or reaches retirement age before they can receive payment from these plans.