“My wife worked for many years for a major corporation while I was self employed. How can I be sure I’ll receive my fair share of her pension?”
There are two common methods to value pension benefits as part of a divorce settlement. The first is the “present value’ or “cash out” method, which awards the non-employee spouse either a lump sum settlement, or other marital assets of equal value, at the time of divorce, in return for the employee spouse receiving 100% of the future pension benefits. The second option is the “deferred division’’ or “future share” method, where each spouse is awarded a portion of the monthly benefit as it is paid in future years.
There are many factors to consider before you decide which is best for you. How close you and your spouse are to retirement age is one aspect to consider. The younger you are, and further from retirement age, you may favor using the cash out method. The further in the future the retirement benefit will occur, the more uncertainty there is regarding the estimated benefit. Some of the other factors you should consider are: other sources of income available to you, your other existing retirement plans, the value of your non-retirement investments, and your ability to fund your retirement from other sources.
A corporate sponsored retirement plan that provides monthly income is known as a defined benefit plan. The value for this type of plan comes from the corporation’s promise to pay the employee a defined amount in the future, beginning at retirement, and continuing for a specified number of years, or for the life of the employee.
If the employee spouse worked for the sponsoring corporation prior to the marriage, for most states, the pre-marriage interest in the pension plan will not be considered marital property. Likewise, the interest in the plan after the divorce, or after the date of separation, will not be considered marital property.
Let’s first look at how a value is assigned under the “present value’ or “cash out” method. The objective is to determine a present value (what it’s worth today) for the marital portion of a stream of income in the future. The present value is then included on the schedule with all other assets and debts and included in the calculation of dividing the marital property. We begin by examining pension plan statements, plan documents, and talking with the plan administrator to determine the amount of monthly income the employee will receive at retirement age, over what period of time the benefit will be paid, and what the vesting percentage is. An employee is 100% vesting once they have met the plan’s requirement for the number of years of service that entitles them to 100% of the benefit.
A Qualified Domestic Relations Order (QDRO) must be used to assign a participant’s benefits in a qualified retirement plan, such as a pension, to another party, for example a former spouse. The QDRO should be prepared by an attorney with expertise in this subject matter. The pension plan document must be thoroughly reviewed to assure that the directions in the QDRO are consistent with the provisions of the plan. Failure to review the document and draft the QDRO properly could result in the non-employee spouse not receiving the benefits they expect.
The QDRO should address what will happen if either party dies before the non-employee spouse receives their full share of the pension. Most pension plans provide for a death benefit payable to a surviving spouse upon the death of the employee spouse. If the employee spouse remarried, the former spouse may not be able to share the death benefit unless the QDRO addresses this issue.
Another issue that may arise is the death of the non-employee spouse. The pension benefits may not automatically pass to the non-employee spouse’s estate. In order to protect the non-employee spouse’s estate, the QDRO should contain language about what happens upon the death of the non-employee spouse.
It is best to have the QDRO “approved” by the plan administrator before the divorce is final. Finding out that the QDRO is rejected after the divorce will cause the parties to have to open the case and incur more time and expense preparing a new QDRO.
Since a pension benefit can be a significant source of future income, your options should be carefully considered. This is an area where you should seek out knowledgeable professional help.
Stephanie Maloney and Jerry Cohen are principals of Financial Solutions for Divorce, a southern California divorce planning firm that helps divorcing couples and individuals achieve lifetime financial security by facilitating a financial settlement that takes into consideration the long-term well being of the entire family.