Defined Contribution Retirement Plans vs. Defined Benefit Plans in Colorado Dissolution of Marriage Proceedings

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In Colorado dissolution of marriage actions, retirement benefits are marital property subject to equitable division under C.R.S. § 14-10-113. Understanding the distinction between defined contribution plans and defined benefit plans is essential because they are valued, classified, and distributed differently. Colorado law governs the division of retirement benefits in dissolution actions under the Uniform Dissolution of Marriage Act, codified at C.R.S. §§ 14-10-101 to -133.

A defined contribution plan is a retirement plan that provides an individual retirement account for each participant. C.R.S. 14-10-113. Under C.R.S. § 14-10-113(6)(b)(III), a defined contribution plan is specifically defined as a plan whose benefits are based solely on the amount contributed to the participant's account. C.R.S. 14-10-113. The defining characteristic of a defined contribution plan is that the account balance is easily determined at any point in time. A common example is a 401(k) plan. The participant makes contributions to the account during employment, and sometimes the employer matches the contributions. A statement is produced that shows the value of the plan.

Defined contribution plans are relatively straightforward to value because the account balance shown on a specific date represents the plan's current value. The marital portion is generally calculated by determining what portion of the account was accumulated during the marriage using the account balance at marriage (if any) and the account balance at dissolution. Division is typically accomplished through a Qualified Domestic Relations Order (QDRO) that directs the plan administrator to allocate a portion of the account into a separate account for the non-employee spouse.

In contrast, a defined benefit plan provides a specified monthly benefit at retirement, typically calculated using a formula based on salary history and years of service. Unlike defined contribution plans, defined benefit plans do not maintain individual account balances. Instead, the employer is obligated to pay a benefit amount when the participant retires which will be calculated at that time based on a variety of factors.

A challenge with defined benefit plans in dissolution proceedings is valuation. Because the plan offer future benefits rather than maintaining a current account balance, determining the present value requires actuarial calculations that account for factors including the participant's age, life expectancy, years until retirement eligibility, projected salary growth, and discount rates. This complexity makes defined benefit plans more difficult to divide than defined contribution plans. Valuation typically requires an expert to calculate present value, which can be expensive and time-consuming. The valuation is subject to assumptions about discount rates, mortality, retirement age, and future salary growth as well, therefore there can be competing expert opinions.

When retirement benefits are being paid, different treatment applies for maintenance and child support calculations. Under C.R.S. § 14-10-114(1)(c)(I)(H), pension payments and retirement benefits actually received are included in gross income for purposes of calculating maintenance and child support, but only to the extent those benefits have not previously been divided as property in the dissolution action. C.R.S. 14-10-114. This prevents double-counting of retirement benefits that were already distributed as part of the property division.

The writer’s Practice Experience: In practice, many people do not account for the fact in support calculations that if a pension is divided as property that it does not also count as income for support.

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