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Social Security Statement in Divorce Financial Planning?

Social Security

An individual’s Social Security Statement can be a valuable resource in your divorce financial planning. Make sure to gather copies of the most recent statements available and we can help you uncover a wealth of financial knowledge.

1. Earnings and employment history.

The Social Security Statement is a great place to look for historical employment earnings. It is valuable to understand the earnings history and trajectory of both parties in a divorce. If tax returns and other documentation are being with-held by your spouse the Social Security statement can provide a valuable baseline.

2. Estimated retirement and disability benefits for long term, post divorce financial planning purposes.

Understanding the long term cash flow is very important when negotiating a financial settlement. Having details of the Social Security administration’s estimated benefits can help me understand your future cash flow and plan more effectively for the future.

3. If there is a public pension.

A worker who participates in California State Teacher’s Retirement System (STRS), California Public Employees Retirement System (PERS) and many other governmental retirement systems may not have paid into the Social Security system. Some may pay into Medicare but not Social Security. You can see this if the worker’s statement has wages in the Medicare taxed earnings column but not the Social Security column. Using the Social Security statement we can uncover the existence of a previously undisclosed pension.

4. Derivative benefits available to a former spouse.

In a marriage over ten years you can receive derivative benefits on the record of your former spouse. The derivative benefit is equal to one half of the former spouse’s benefit which can be found on their annual statement. This is useful for long term planning and can be important in long term spousal support negotiations.

5. Social Security and Medicare tax details.

We often need to estimate incomes for negotiation purposes. A common mistake occurs when the 6.2% Social Security tax is applied to the worker’s entire income. Instead the tax should be applied up to the maximum wage base for Social Security taxes. If you apply the tax to $300,000 of income the net, after tax income will be understated by over $10,000 per year.

6. Possible application of Government Pension Offset Provision (GPO) or Windfall Elimination Provision (WEP).

Those workers mentioned in #3 above may find themselves subject to the GPO or WEP and end up receiving less benefits than they expected if not careful. It is always important to understand how these government provisions affect an individual in divorce. The Social Security Statement even talks about them in the bottom right hand corner of page 2 in it’s current lay-out.

7. Existence of tax deferral vehicles such as deferred compensation plans and retirement accounts.

If the numbers reported under Medicare wages don’t match those reported in the Social Security earnings column there may be tax deferral vehicles like deferred compensation plans that are being used. The worker may also have simply hit the wage base maximum after which Social Security taxes are no longer incurred but Medicare taxes are.

8. Misreported income.

In California an individual involved in divorce proceedings must file a declaration of disclosure detailing their income and expenses and sign it for accuracy under penalty of perjury. This doesn’t keep people from reporting incorrect figures. If the Social Security Statement doesn’t match what is reported on the declaration there better be an explanation.

The Social Security Administration is provides an online version of taxpayers’ statements. The online version is now available at www.socialsecurity.gov/mystatement.

Your Wellspring Divorce advisor can uncover a lot from simple and easily available documentation. Imagine what we can find with a complete and accurate set of financial documents.

QDRO Process Explained: Click here to find out how to get started.

QDRO

What do I need to know about a QRDO?

The QDRO process can take months to complete making it very important the process is started as soon as possible. Following is a timeline of the process you should expect when filing a Qualified Domestic Relations Order.

Let’s get started.

  1. An attorney experienced in drafting Domestic Relations Orders is identified and engaged by the parties.
  2. The QDRO Specialist drafts the Domestic Relations Order in accordance with specific plan provisions and the agreements reached by parties to the proceedings.
  3. The parties, together with their respective attorneys and financial experts review and approve the draft document.
  4. The Draft Qualified Domestic Relations Order is submitted to the Plan Administrator for pre-approval.
  5. The Plan Administrator responds to the drafter with any necessary revisions.
  6. Requested revisions are made to the QDRO and the revised copy is sent to parties and attorneys for review and signature.
  7. The approved QDRO is signed by both parties and sent to the court for the judge’s signature.
  8. A copy of the singed and court certified Qualified Domestic Relations Order is sent to attorneys or parties.
  9. The certified singed copy of the QDRO must be sent to the Plan Administrator for processing. Some QDRO experts will send the approved document to the plan administrator for the clients. Make sure you know who will take on the responsibility and do not make assumptions.
  10. The Plan Administrator will send a letter to the participant and alternate payee with instructions on how to access the plan and a timeline for completion of the division. It may be necessary for the Alternate Payee to stipulate an outside account for benefits to be rolled to.
  11. The Plan Administrator calculates the division of the plan pursuant to the QDRO and creates a separate account for the Alternate Payee.
  12. The Alternate Payee will receive confirmation that their benefits have been partitioned into a separate account or rolled over into the account previously stipulated.

 

For more information about the Qualified Domestic Relations Order and how it can affect you, visit our article Retirement Accounts & Divorce: Why you need a QDRO.

 

At Wellspring Divorce Advisors, we use state of the art divorce financial planning and forecasting tools for long term projections, retirement plan valuation, support scenario comparisons, and negotiation tools including child support and alimony guidelines. Click here to find out how we can help you.

What is a Qualified Domestic Relations Order?

Retirement plans such as 401(k)’s and defined benefit pension plans are often among the largest assets to be divided during the division of a martial estate. Many of these plans are governed by a set of federal laws known as the Employee Retirement Income Security Act of 1974 or ERISA. ERISA allows an Alternate Payee such as a former spouse to receive a portion of the employee’s benefits with a court order. A Qualified Domestic Relations Order (QDRO) is the court order required to give notice to a retirement plan administrator that an Alternate Payee is entitled to a portion of the plan. Without a QDRO the plan administrator cannot legally make payments to the Alternate Payee.

Who Should Draft My QDRO?

A Qualified Domestic Relations Order should be drafted by an attorney familiar with this subset of legal practice. The drafting of a Qualified Domestic Relations Order is an important step in the divorce financial planning process. Financial planners have specific and far reaching knowledge of retirement plans and the underlying laws that govern them but are ill-equipped for drafting the actual Domestic Relations Orders as they are usually not attorneys.

For a QDRO to be valid and accepted by both the court and the plan administrator it must contain specific requirements under the law as well as be tailored to that specific plan. Retirement plans may even reject court certified orders that were not pre-approved by their own staff. For this reason it is necessary for a draft to be sent to the plan administrator for pre-approval prior to seeking court certification.

Wellspring Divorce Advisors suggests the qualified domestic relations order be drafted and pre-approved prior to finalizing the global financial agreements. We have seen many individuals still fighting to get their share of the retirement plans awarded to them years after settlement because the other party refuses to sign. See more on the QDRO Process here.

Are pension and other retirement plans considered marital assets and subject to division in divorce?

Yes, retirement plans are marital assets subject to division to the extent they were earned during the marriage. State laws differ on how to determine exactly what “earned during marriage” means so be sure to check with a local expert. In California the presumption is that any pension plans, 401K balances and other retirement accounts are community property and subject to division unless/until proven otherwise. If the retirement plan benefit was earned during marriage it will be divided.

In order to earn pension benefits a worker must be employed and participating in the plan.

In order to participate in a 401K plan the worker must make contributions to the plan by deferring wages from his or her regular paycheck.

Since both examples would require the participant to earn their benefit in one form or another, either time in the pension plan or contributions to the 401K, these earnings are considered community property or martial assets and will typically be divided 50/50 unless their are other extenuating circumstances or the parties agree otherwise.

Be careful though to make sure you are dividing apples with apples as retirement plans are pre-tax money where as other assets may have already been taxed. The difference in value between $100,000 pre-tax and $100,000 after tax could be $20,000 or even $50,000.

Social Security and Divorce

This Saturday we will be presenting a Social Security benefit course for clients and other professionals we work with during dissolution proceedings such as attorneys, mental health professionals and accountants. Social Security benefits are an often misunderstood piece of the divorce financial planning picture because they are governed by federal laws, not the local laws of the state you reside in but a little planning can go a long way. Check out our past blog posts on Social Security benefits and Divorce here.