Pensions, Retirement plans, and Deferred Compensation Plans

The value of a defined benefit plan is based on a formula derived from the length of service and the participant’s salary. Depending on the plan, sometimes weighted factors are used based on the type of service involved and/or the participant’s age. At retirement, the values associated with the factors in the formula are plugged in, and the amount of the monthly benefits is determined.

Many defined benefit plans have survivor annuities. If the participant were to die first, depending on the generosity of the plan, the plan may or may not allow for a divorced spouse to be considered a surviving spouse eligible for benefits upon the participant’s death. There are instances — mostly associated with public pension plans — in which older and/or retired couples may decide to legally separate instead of divorcing in order to preserve valuable surviving spouse benefits, which would otherwise be lost upon dissolution. If either spouse has already retired under a pension plan at the time of separation, both parties will need to know what options the participant selected at retirement and whether or not those options are revocable.

Defined contribution plans are plans in which an employee and/or an employer contribute to a retirement account. A common example is a 401k plan. The account fluctuates in value depending on how it is invested, and on any given day, it has a readily discernible balance. Usually, the participant directs how the assets in the plan are invested. These plans tend to be simpler to divide.

Both defined benefit and defined contributions plans are divided at divorce pursuant to a special order called a Qualified Domestic Relations Order (QDRO, pronounced Quadro) for private, ERISA-governed plans, or a Domestic Relations Order (DRO) for public plans. These Orders may be drafted by your family law attorney, an attorney specializing in retirement division, or an actuary. Which type of professional drafts the QDRO or DRO is often determined by the complexity of the plan and Order. Ford Family Law works with a range of talented professionals who draft QDROs and DROs and advise us on issues regarding division and opportunities to maximize retirement benefits during divorce.

Defined benefit plans are generally divided using the time rule, wherein the community interest is expressed as a fraction, the numerator of which is the time employed under the plan during the marriage, and the denominator is the total time employed under the plan by the participant. This fraction is then multiplied by either the number of service credits or the amount of the monthly benefit to determine the overall community interest in terms of the plan benefits. If the community interest is to be equally divided, each spouse would receive 50% of the overall community interest. However, for various reasons, one spouse may be awarded more of the community interest or all of the community interest in the plan. If the community interest is less than 100% of the plan benefits, the remainder would be confirmed to the participant as his or her separate property.

Defined contribution plans are generally divided by determining the contributions made to the plan by the participant, the employer, or both during marriage, together with any gains or losses thereon. Any contributions made prior to marriage or after the date of separation would belong to the participant as his or her separate property. If there is a separate property component to a defined contribution plan, an analysis would need to be done to determine the allocation of the plan between the community and separate interests and any investment gains or losses that have occurred.

Complexity as to the division of defined benefit and defined contribution plans depends on many factors. These factors include whether the plan is a defined benefit or defined contribution plan, whether the plan is a public plan or a private, ERISA-governed plan, if it is a public plan, whether is a Federal or U.S. Military Plan, whether the participant has already retired, whether the participant is receiving a disability pension in lieu of a regular retirement pension, whether one spouse has a separate interest, and more.

Often one spouse will wish to retain all of his or her retirement benefits and offset them through the award of other assets or a cash payment to the other spouse. A “present value” is calculated to create a proposal for the buyout. Ford Family Law works with actuarial consultants who analyze various factors relevant to the worth of the pension.

In domestic partnerships and same-sex marriages, there may be complex issues regarding pension valuation and division, depending on the date of partnership or marriage and the type of plan. When proceeding with the valuation or division of a retirement plan within a domestic partnership or same-sex marriage dissolution, it is important to be aware of how timing may affect the division of property. Ford Family Law works with experts at the intersection of family law and valuation and division of retirement benefits in order to understand how these complex issues affect the valuation and division of individual plans and to achieve the appropriate, legal division of retirement benefits in such cases.