The short answer to “What happens to my retirement accounts if I get divorced in Arizona?” is “About half of the value will probably go to your spouse.” The longer, more technical answer requires a bit of background first.

Arizona Is a Community Property State

Arizona, and a handful of other states, view marriage as a community. In turn, the “community” shares assets and acquires an equal stake in such assets. We have explained the underpinnings of community property in greater depth before, but the following is what you need to know for these purposes. Almost all property you acquire during the marriage is “community property.” Almost all property you acquire before or after the marriage is “separate property.” By combining your separate property with community property or with your spouse’s separate property, you generally transform it into community property. These same rules apply for property acquired in other states, even in non-community property states. During divorce proceedings, the court demarcates separate versus community property, then assigns all separate property to its owner and equitably distributes the community property between the two parties.

How Does Arizona Being a Community Property State Affect Your Retirement?

As mentioned, almost all property acquired during the marriage is community property. This includes employment income. And as it turns out, Arizona courts view pensions and other retirement benefits as “deferred compensation for services rendered by employees,” thus including retirement benefits in community property [1][2]. In other words, you can expect your vested retirement account to be divided roughly equally with your spouse in a divorce, as long as you contributed to that retirement account during the marriage.

But not all cases are so straightforward. Indeed, few are as simple as logging into your account website then dividing the number by two. For one thing, the community only has claim to the portion that was accrued during the marriage. Trial courts thus need to calculate the value of the retirement benefits that were earned during the marriage as compared to the value earned outside the marriage.

Another common cause of complicated allocations is that the divorce occurs before spouses retire. In other words, the retirement account did not yet vest (see below for what it means to “vest”). When this happens, Arizona courts apply one of two approaches:

1.  Present Cash Value Method. The court first determines the community interest by dividing the number of years worked toward the retirement benefits during the marriage by the number of years worked toward the retirement benefits in total. This fraction is then multiplied by the current, actual value of the account. The court then awards the non-employee spouse half of that amount, usually in the form of community assets (e.g. a house). This method is particularly harsh to the employee spouse because they must pay the other spouse without any guarantee that their rights to the future income will ever materialize according to the present calculation (e.g. they could lose their job due to matters out of their control). Nevertheless, courts prefer this method when the present value of the account can be ascertained with reasonable accuracy and the community assets are sufficient in value to avoid unduly causing hardship to the employee spouse [3].
2. Reserved Jurisdiction Method. At the time of divorce proceedings, the court determines the formula it will use to determine the interest deserved by the non-employee spouse. But it will not order payments yet. Instead, the court waits until the retirement account vests, at which time it will then use the pre-determined formula to allocate payments. This has the advantage of allowing the employee spouse to pay gradually with cash, rather than by liquidating or surrendering community assets. Courts disfavor this approach in most cases, however, because it requires ongoing court supervision for significant periods while the parties wait for the retirement account to vest. It is generally only used when the value of the community assets is too low to satisfy the amount owed [4].
3. Other. Which method to use isn’t always clear, however. For example, what if a retirement benefit plan has vested, but the employee refuses to retire? In that case, using the reserved jurisdiction method would risk the employee working until they die, resulting in the non-employee spouse receiving nothing because of death benefits statutes. But if the present cash value method is applied while the community assets are insufficient to cover the lump sum payment, this would effectively force the employee spouse to retire against their wishes. Neither result is preferable. Accordingly, the Arizona Supreme Court suggested combining the two approaches: Order the employee spouse to make monthly payments based on the value of the account, beginning immediately [5].

But What Does It Mean to “Vest” Under Arizona Law?

Above, we talked about “vested” versus “not yet vested” as if the two are intuitively understood. The terms are not always so clear, however. For example, consider a retirement plan that pays $1000 monthly after ten years of service, but twice that amount after fifteen years of service. Does the plan “vest” after ten years or fifteen years? As it turns out, the answer is fifteen years. In Arizona, retirement plans vest at such point that the recipient has an unconditional right to the maximum benefits offered under the plan [6].

Conclusion

In Arizona, assuming you worked toward growing your retirement accounts for any time during the marriage, they are considered community property that will be partially distributed to the other spouse in a divorce. The only questions are what percentage is distributed and when is it distributed. The answer to those questions depends on your timing and marital resources. The proportion of your employment during the marriage compared to outside the marriage determines the percentage. As for time of disbursement, judges can either calculate a lump sum payable immediately, calculate monthly sums payable after the accounts vest, or a combination of those two approaches. This is largely determined by the extent of marital resources that can be used to pay the other spouse immediately and the temporal proximity from full vesting of your retirement benefits. While this system has its downsides for both parties, it strikes a reasonable balance between protecting both spouses’ interests and following Arizona’s property laws.

[1] Johnson v. Johnson, 131 Ariz. 38, 41 (1981).

[2] But note, this does not apply to disability payments for military members. Your spouse has no right to any portion of those. See Merrill v. Merrill, 230 Ariz. 369, 372 (Ct. App. 2012).

[3] Johnson, 131 Ariz. at 41.

[4] Id.

[5] Koelsch v. Koelsch, 148 Ariz. 176, 181-85 (1986).

[6] Boncoskey v. Boncoskey, 216 Ariz. 448, 453 (Ct. App. 2007).

Leslie A. Satterlee is a partner at Woodnick Law and has been practicing family law exclusively since graduating cum laude from ASU’s Sandra Day O’Connor College of Law. Her practice involves complex asset driven divorce matters.

Sam Fraser is a 2l at Sandra Day O’Connor College of Law. As a law clerk at Woodnick Law PLLC, Sam has the opportunity to assist with real cases and to research areas of interest relating to his future practice of law.