By FPA Members Elaine King, CFP®, CDFA™ and Philip Herzberg, CFP®, MSF
Last Updated: October 3, 2011
When and how you apportion your retirement plan and employee benefits between you and your divorcing spouse is an essential family financial concern. With the collective guidance of an experienced attorney, tax professional, and divorce financial planner, you should be cognizant of the federal regulations pertaining to your Social Security and health insurance benefits, as well as knowledgeable about how your state specifically defines applicable retirement benefits upon divorce (marital or separate property).
As your divorce decision-making has a direct impact on your future security, make sure you comprehensively evaluate your employee benefits and plan ahead by knowing the following significant insights:
Familiarize yourself with Social Security rules and divorce considerations relating to spousal and survival benefits
- If you were married for at least 10 years to someone who paid into the Social Security system, you can receive benefits at age 62 based on your former spouse’s earnings. Note that these Social Security benefits become available to you after you have been divorced two years, regardless of whether your divorcing spouse claims benefits. In addition, you can not be eligible for an equal or higher benefit on another former spouse in order to qualify for a benefit on the record of your divorcing spouse.
- Recognize that you will usually receive 50 percent of the wage-earned benefit at your full retirement age, with the amount received reduced if you claim benefits early. To apply for benefits on your former spouse’s record, you will need either the spouse’s Social Security number or date and place of birth and parents’ name. Learn more about details pertinent to divorce and Social Security benefits.
Be wary that divorce and remarriage can affect your Social Security benefits and options. If you remarry before you reach the age of 60 and remain married to your second spouse, you lose the ability to claim spousal or survival benefits based on your former spouse’s account. Alternatively, if you remarry after age 60, you retain rights on your former spouse’s benefits for your lifetime.
Protect your health care benefits through your former spouses employer under COBRA
- How will divorce impact you and your family’s health insurance benefits? If your health insurance is provided through your divorcing spouse’s employer-based policy, and 20 or more people work for that employer, you can continue and pay for your health care coverage under the federal Consolidated Omnibus Budget Reform Act (COBRA) for up to 36 months after the divorce is final. Check the current policy and compare the costs of other private or your own employer’s health plans before determining whether to obtain COBRA coverage through your former spouse’s employer. Under COBRA, the employer is allowed to charge up to 102 percent of current employee’s premium for your continued coverage. You can request a quote for the cost before your divorce is final.
- Under COBRA, your divorcing spouse’s employer must inform you of your right to continue the coverage when your divorce becomes final and the time period for enrollment post divorce. If you do not enroll within the specified time period (usually 30-60 days from date of divorce), you have forfeited your right to purchase COBRA health insurance benefits. It is a good idea to obtain all of the enrollment paperwork before your divorce is final.
- You will receive the same health care coverage and benefits that you had prior to the divorce. If your former spouse’s employer makes modifications to the health care plan that apply to all current company workers, then the changes will apply to your COBRA coverage.
As risk management is a pivotal facet of divorce financial planning, you should consult with the employee benefits or human resources department at your divorcing spouse’s company to see if life and disability insurance are available. To protect your income stream, appropriately assess maintaining or adding a new insurance policy on the life of your former spouse paying child support or alimony.
Decide the optimal approach to handling stock options in your divorce
- Do you or your divorcing spouse have employer benefits in the form of stock options, stock incentives, or nonqualified deferred compensation plans? Deal with possible stock option valuation uncertainty and carefully strategize your finances during the divorce process by talking about these plan benefits and tax considerations with a divorce lawyer and credentialed accounting professionals. Ascertain if you have all documentation relevant to the options as furnished by the employer with grant provisions, price, and important dates identified in the agreement.
- Be advised that you can generally make after-divorce vested employer tax-free transfers of incentive stock options (ISOs) and nonqualified stock options (NQSOs) between you and your former spouse according to the terms of the divorce settlement. Realize that the option to buy stock under an ISO cannot be transferred from you to your former spouse. Conversely, you may be able to transfer an NQSO from your employee plan to your divorcing spouse, who will be liable for income tax when exercising the option.
- Similar to the stock option choices, nonqualified deferred compensation plans are legally complex to value at divorce and difficult to transfer. Request as much information as possible from your employer to better understand how nonqualified deferred compensation plans impact your money matters.
Acquaint yourself with these financial items during the divorce process and understand the full implications of how they could affect your future well-being. Ultimately, you can be proactive sharing your retirement plan and employee benefits to enhance your life planning.
FPA member Elaine King, CFP®, CDFA™ Managing Director at The Lubitz Financial Group in Miami, Fla. FPA member Philip Herzberg, CFP®, MSF, is Director of Media Relations & Public Awareness for FPA of Miami-Dade.