Retirement Plans after Divorce

Retirement Plans After Divorce

What is the “Vesting Period” of a Retirement Plan?

When meeting with clients, we are often asked, “What does ‘vesting’ mean?” With respect to retirement plans, a vesting period is typically the amount of time that an employee is required to stay at his or her job before he or she will be entitled to the provisions of a company pension plan. Years ago, the vesting period used to be quite long because employees tended to be “lifetime” employees; however, America’s workforce has gone through dramatic change, and accordingly, the Employee Retirement Income Security Act of 1974 (ERISA) drastically shortened the vesting periods of defined benefit plans.

In a divorce, when it comes to the valuation of the marital estate, the issue with respect to one’s retirement plan is whether the benefits that accumulated prior to vesting should be included as part of the marital estate. For instance, let’s say that a pensioner gets married when he’s 5 years into an 8-year vesting period. An argument could definitely be made to exclude any pre-marital amounts from the estate because he would not have been eligible to receive the pension amounts when he was initially married. However, ERISA’s significantly shorter vesting periods has alleviated this issue because since vesting periods are now fairly short, the adjustments caused by their existence are usually negligible.

Another vesting-related issue that we are often faced with is the accounting theory of accrual, a classic example of which is accounts receivable. Accounts receivable are those amounts that are owed to a business for goods or services rendered. Such amounts are normally considered to be assets in business valuations, and accordingly, they are subject to division in a marital estate, even if the amounts aren’t due yet.

The same idea can be applied to the vesting of a retirement plan. Those amounts have been earned, but the employee is not eligible to get them yet. As a result, any argument for the exclusion of benefits earned before the end of the vesting period might not stand in comparison to other fiscal or accounting theories. This is particularly true when subsequent events (such as the actual vesting) prove that the amounts earned before the end of the vesting period are, in fact, part of a financial benefit that will be received in the future.

Contact An Englewood, New Jersey Divorce Lawyer

Divorce is a complicated matter. The vesting of a retirement plan is one of many important factors for some to consider when divorce is a reality. If divorce is in your future, contact The Radol Law Firm to discuss your matter with an effective and experienced New Jersey divorce attorney with significant financial experience.