Dividing a 401(k) plan in a Tennessee divorce
For many Tennessee couples, a retirement plan is their most valuable asset. Some couples will forego other forms of retirement investment or savings and instead invest in an employer-sponsored plan that also draws employer contributions. If a couple has been married for many years and has been contributing to the retirement account during the entire length of the marriage, the plan can have significant value. When the possibility of divorce looms, dividing the retirement plan (or plans, if both spouses have their own plans) can become a major issue in the division of marital property.
One of the issues is the degree to which a plan participant is vested in the plan. “Vesting” means the percentage of plan assets in an individual’s account that are treated as being owned by the participant. Subject to the minimum vesting requirements of federal laws, different plans will have different vesting provisions. The Tennessee Supreme Court has held that both vested and unvested benefits are marital assets that must be divided by the trial court if the parties do not agree on a division.
Vested benefits are generally valued according to their present cash value as of the date of the divorce. Present cash value is an accounting formula that determines the current value of a stream of future payments after making certain assumptions about interest rates, the life expectancy of the participant and the amount of the payments. Unvested benefits can also be valued by the present cash value method, but payment of the benefits is delayed until they are received by the participant. In both cases, the court will make appropriate adjustments in the division of marital assets to reflect an award of an interest in a spouse’s retirement plan.
Anyone who is contemplating a divorce and who owns (or has a spouse who owns) an interest in a retirement plan will benefit from consulting an experienced divorce lawyer. A knowledgeable attorney can provide advice on the value of a pension plan and suggest ways of allocating the plan benefits that will protect the client’s interest in this very valuable asset.