Retirement accounts can represent a significant portion of a couple’s financial assets, particularly after a long marriage. When a couple divorces in Maryland, determining what happens to those accounts can be an important part of dividing marital property.

Retirement benefits are not necessarily divided simply because an account is in one spouse’s name. Maryland law provides rules for determining what constitutes marital property and gives courts several options for addressing retirement interests as part of the divorce process.

Because retirement plans can involve complex valuation and distribution issues, it is important to understand the process before assuming that a particular account will be divided in a particular way.

Are Retirement Accounts Marital Property in Maryland?

Under Maryland law, marital property generally includes property acquired by either spouse during the marriage, regardless of how the property is titled. Maryland courts specifically recognize pension, retirement and deferred compensation interests as potential marital property.

That does not necessarily mean that an entire retirement account belongs to both spouses.

For example, if one spouse had a retirement account before the marriage and continued contributing to it during the marriage, some portion of the account may be marital while another portion may be nonmarital. Determining the marital and nonmarital portions can require a careful review of when the funds were earned or contributed and how the account was maintained.

Likewise, certain property acquired before marriage, gifts or inheritances made solely to one spouse, and property that can be traced to those sources may be considered nonmarital under Maryland law.

Maryland Uses Equitable Distribution

Maryland is an equitable distribution state. This means that marital property is not necessarily divided equally between spouses simply because the parties are divorcing.

Under Maryland Family Law § 8-205, after determining what property is marital and establishing its value when required, a court may transfer an interest in certain retirement or deferred compensation plans or award a monetary amount to adjust the parties’ respective interests in marital property.

In determining an appropriate monetary award or transfer, the court may consider factors including each party’s monetary and nonmonetary contributions to the family, the value of each party’s property interests, the parties’ economic circumstances, the length of the marriage, the age and condition of the parties and other relevant circumstances.

As a result, there is no automatic rule that each spouse receives exactly one-half of every retirement account.

Different Types of Retirement Assets May Require Different Approaches

Retirement assets can take many forms, including:

• 401(k) plans
• 403(b) plans
• Traditional and Roth IRAs
• Pension plans
• Profit-sharing plans
• Deferred compensation plans
• Government retirement benefits
• Military retirement benefits

The method used to address a retirement asset can depend on the type of plan and the circumstances surrounding the account.

For example, a defined contribution account such as a 401(k) may have an identifiable account balance, while a traditional pension can involve a future stream of payments that must be valued or divided according to applicable rules.

Military retirement can involve additional considerations as well. A recent Maryland appellate decision addressed how the marital portion of a military retirement benefit may be calculated when the service includes both active-duty and reserve service, illustrating why the details of a particular retirement benefit matter.

How Can Retirement Benefits Be Divided?

Depending on the circumstances, retirement interests may be addressed in several ways.

A court may transfer an interest in a pension, retirement or deferred compensation plan from one spouse to the other. Alternatively, the overall division of marital property may be structured so that one spouse receives other marital assets in exchange for retaining a greater portion of a retirement account.

The specific approach can depend on the type of retirement asset, its value, the parties’ other property and the circumstances of the divorce.

In some cases, retirement benefits may be divided on an “if, as, and when” basis, meaning that the nonemployee spouse’s share is paid when the retirement benefit becomes payable. Maryland law also contains specific rules concerning when a party must object to this method and provide notice if they intend to present evidence concerning the value of the retirement benefit.

What Is a Qualified Domestic Relations Order?

Some retirement plans require a specific court order to divide benefits. A Qualified Domestic Relations Order, commonly called a QDRO, is one type of order used with certain employer-sponsored retirement plans.

A QDRO can establish the right of an alternate payee, such as a former spouse, to receive some portion of a retirement benefit that would otherwise be payable to the plan participant. The specific requirements depend on the retirement plan and applicable law.

The Maryland State Bar Association has recently emphasized that retirement-order issues can be complicated and that problems often arise from timing, drafting and assumptions about how the division will be handled after the divorce decree is entered.

This is why a retirement account should not simply be treated like an ordinary bank account when negotiating or finalizing a divorce settlement.

What About Contributions Made Before or After the Marriage?

Determining the marital portion of a retirement account can become more complicated when contributions span different periods.

An account may contain contributions made before the marriage, contributions made during the marriage and, potentially, contributions made after the spouses separated. The treatment of those different portions can depend on the circumstances and applicable Maryland law.

Careful documentation can therefore be important when determining which portion of a retirement asset may be subject to division.

Don’t Forget Beneficiary Designations

Divorce can also be a reason to review beneficiary designations associated with retirement accounts.

A divorce decree or marital settlement agreement may address certain financial interests, but beneficiary designations and plan requirements can involve separate considerations. Anyone going through a divorce should review the beneficiary provisions associated with retirement accounts and discuss any necessary changes with their attorney and plan administrator.

Changes should not be made based solely on assumptions about what a divorce decree will accomplish.

Why Retirement Accounts Should Be Addressed Early

Retirement assets can be among the most valuable assets in a marital estate, and mistakes in identifying, valuing or dividing them can have significant financial consequences.

Before agreeing to a property settlement, spouses should have a clear understanding of the retirement assets involved, including the type of plan, the approximate value, when contributions were made and whether any portion may be nonmarital.

Maryland law also allows a court, under certain circumstances, to transfer an interest in a retirement plan or make a monetary award as part of the equitable distribution of marital property.

How Rodier Family Law Can Help

Dividing retirement accounts during divorce can involve much more than determining a percentage of an account balance. The type of retirement plan, timing of contributions, marital and nonmarital interests, valuation and the appropriate method of distribution can all affect the outcome.

Rodier Family Law can help clients understand how Maryland’s marital property laws may apply to their retirement assets and work toward a divorce agreement or litigation strategy that addresses the financial issues involved.