Arizona, of course, is a community property state. How does that affect the retirement account accumulated by one spouse during their marriage?
Community property and the retirement account
One spouse may have an interest in the other spouse’s retirement account, especially when it was accumulated during the marriage. State law, however, often takes a back seat to federal pension law. Figuring out what interest a spouse may have acquired in a worker’s retirement benefits — and how to protect that interest — can be challenging.
Government pensions especially complicate the issue. The Employee Retirement Security Act of 1974 (ERISA) doesn’t apply to most government employees. Still, most state retirement accounts have adopted a similar approach to dividing pension benefits.
Take Arizona, for example. The Arizona State Retirement System (ASRS) handles retirement savings for most state employees, and many other government workers. ASRS will recognize a division of retirement benefits in a divorce proceeding — but only if it receives a suitable “domestic relations order.” They even provide a sample form to make it easy to comply, but unless the right order is signed and submitted, the retirement account still belongs to the worker.
Imagine a divorcing spouse who has done everything he or she was supposed to do. They included the retirement account in the divorce decree. They filled out the right forms and submitted them. The folks at ASRS acknowledged that they had everything they needed. The divorcing spouse now owns their share of the retirement account. It’s just as if they were the original worker, right?
Not exactly. Meet Julie and Michael.
Julie and Michael married in 1998, and divorced in 2009. Their divorce was fairly amicable. Michael worked for the state of Arizona, and acquired an ASRS retirement plan.
The divorce decree included the ASRS benefit. It assigned a share of Michael’s pension rights to Julie. Julie did what she was supposed to in order to get the decree qualified and file it with ASRS. Everything was working just fine.
In 2014 — just five years after the divorce decree — Michael reached his normal retirement age. Julie figured that made it possible for her to collect “her” share of the retirement benefits.
But Michael didn’t intend to retire at the earliest date. He kept working. In fact, he’s still working today — five years later. Under ASRS rules, Julie doesn’t get her retirement benefits until Michael actually retires, and starts drawing on his account.
Julie sued Michael. She asked the judge to order him to pay her the benefits she would get if he did retire. Michael objected; he intended to keep working for another five years, and didn’t think his ex-wife could make him retire.
Assignment of retirement account benefits
The Arizona divorce court ruled in Michael’s favor. Julie “owns” a share of his retirement account, as she insisted. But she doesn’t have control over how and when he initiates the retirement account payout.
Julie appealed, but the Arizona Court of Appeals agreed with the divorce judge. They noted that Julie had agreed to the particular valuation of her interest, and the method of assignment, at the time of the decree. Had she wanted to assure that she would receive benefits starting in 2014, she needed to have made a different arrangement before the decree was signed.
Michael asked the divorce judge to order Julie to pay his attorneys fees and costs. The judge declined to do so, and the Court of Appeals upheld that denial. The appellate court also ordered Michael to pay his own fees on appeal, as well. Quijada v. Quijada, February 19, 2019.
Could Julie have sued ASRS to force them to pay out “her” interest in the retirement account? No, because ASRS rules delay payment to what they call an “alternate payee” until the covered participant meets the retirement requirements. That means Julie will receive nothing from ASRS until Michael retires and begins to draw benefits. Then she will start getting checks for her share under the divorce decree.
Would the same rules apply to any retirement account?
It is not easy to generalize Julie and Michael’s situation to all other retirement accounts. The divorce court division of an IRA or 401(k) retirement plan, for instance, is likely to be handled differently. Most defined benefit plans would probably follow rules similar to the ASRS approach, however.
What about Social Security benefits? Completely different rules apply to former spouses under Social Security. On another day, we’ll try to explain those rules.
What could Julie have done to make sure she started getting benefits earlier? She could have insisted that Michael give her the current value of her share of his retirement benefits. That might not have been a realistic possibility, though. The appellate decision notes that Julie received most of the couple’s non-retirement assets in the divorce proceeding.
