Pension Benefits and Divorce

A pension is a type of defined benefit plan. It is different from a 401K plan or profit sharing plan. Defined benefit plans “define” the benefit a person will receive at retirement. For example, a defined benefit plan may “define” the benefit as 66% of a person’s average salary for his or her last three years of employment. Defined contribution plans are often lump sum accounts that increase with employer and employee contributions. Such plans increase or decrease based on the investment performance of the accounts.

Community property generally consists of assets that a couple acquires during marriage. You may think an “asset” is a thing you can see and touch like a car. A community property asset can also be something you cannot see and feel in the usual sense. A benefit that will not be paid for years to come and that depends on age and years of service is this kind of “asset”.

If a man began earning service toward a pension on the day he married, and if he began receiving it on the day he filed for divorce, all of his years of service would also be years of marriage. In simple terms and subject to exceptions, his entire monthly benefit would be community property. His ex-spouse would be entitled to receive 50% of each monthly payment.

But, if only half of his years of service were also years of marriage, the community’s interest would be (in simple terms and subject to exceptions) only 50% of his pension benefit. His ex-spouse would be entitled to receive 25% of each monthly payment.

A 40 year old employee with the right to a pension at age 65 may decide not to pay a lawyer and experts to help her divide that “asset” with her “ex”. She may think her “ex” will forget about it. She may believe that if enough time passes, her “ex”’s right to the benefit disappears. This is not correct. Although the right to sue for a car accident may disappear with time, the right to share in a pension does not. The 40 year old employee may receive an unpleasant birthday surprise at age 65 if her “ex” reappears and demands a share of her monthly benefit.

During the initial divorce proceeding, there are often personal and financial incentives to wrap everything up at one time. A husband might agree to give up his interest in his wife’s 401K if she gives up her interest in his retirement annuity. A wife might give up her interest in her husband’s pension if she can keep the family home. The cost to divide jointly owned property years later may be higher than the cost to divide it during the original case. In short, waiting too long to divide your community property may have unpleasant financial consequences.

Most defined benefit plans require divorcing parties to submit a “qualified domestic relations order” (a QDRO) before they will honor the parties’ partition agreement. There is no universally acceptable QDRO. Each plan may have its own particular QDRO requirements. There are experts who specialize in the preparation of QDROs. It may be a good idea in your case to use such an expert so there are no problems with the pension payments when you reach retirement age.

Valuing future retirement benefits is no easy matter. If you are thinking about buying your spouse out so he has no interest in your future benefits, you will need to consider many factors. What will your final salary be? What happens if you lose your job or resign and go to work somewhere else? How much should you pay her to buy her out? If you hire experts to calculate what your pension is worth, it is easier to “horse trade”.

In conclusion, if your employer offers a pension among its other employee benefits, you should tell your divorce lawyer about it. Ask for a division of all your community assets in your initial divorce proceeding. Don’t be penny wise and pound foolish where expert advice is concerned. If you need to divide a pension, an ounce of prevention is worth a pound of cure.