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As everyone knows, part of divorce is dividing up the property you have accumulated during your marriage. Certain assets are easier to divide than others, of course. For example, it’s easy to determine the value of a bank account and to split up what is in it. Other assets are more challenging. Pensions, or defined benefit plans, are usually in the latter category. Even though a pension was earned by one spouse, if it was earned during the marriage, it is marital property subject to division in divorce. In some marriages, it may be one of the largest marital assets. Handling pensions in divorce can be a headache not just for the spouses, but often for attorneys as well. Here’s why.
Pension plans are a unique type of retirement benefit. They are called “defined benefit” plans because the recipient receives a fixed amount, generally on a monthly basis, upon retirement. However, that amount depends on a number of factors, including retirement age, so the beneficiary of a pension plan probably won’t know what their monthly pension payment is until they actually retire. Nor will they know how much they will ultimately receive in pension benefits, since that depends on how long they live.
To further complicate matters, pensions may have a single-life payout, meaning that payments stop when the primary beneficiary dies. Others are joint-life payout, meaning that a surviving spouse keeps receiving payments even after the primary beneficiary dies. Single-life results in a higher monthly payment, but joint-life provides more security for a survivor. It’s important to be aware of which type of payment you (or your spouse) elected because that will affect how the asset is divided in divorce.
As if that weren’t enough, pensions are often partly marital and partly non-marital property. That happens when one spouse began working and earning the pension benefit before marriage, then continues working for the same company after marriage. Only the part of the pension earned during the marriage can be divided in a divorce. It’s often not a straightforward process to determine what part of the pension is marital and which is non-marital.
Trying to anticipate the future value of the pension and identify how much of the pension is marital and separate is hard enough. Then you actually have to divide it.
Unlike dishes in a cabinet or books on a shelf, you can’t physically divide a pension benefit between yourself and your spouse. For one thing, a beneficiary typically can’t draw funds out of a pension account until retirement. To the extent that it is possible to withdraw funds, there are typically steep penalties or punishing tax consequences for doing so.
Pension plans are governed by the Employment Retirement Income Security Act of 1974, commonly known as ERISA. ERISA requires that defined benefit plans like pensions be divided using a Qualified Domestic Relations Order, or QDRO. A QDRO is a detailed legal document describing exactly how the pension benefit will be divided. Technically, until the document is accepted by the pension’s plan administrator, it is just a “DRO.” Acceptance by the plan is what makes the order “qualified.”
Why do you need a QDRO? Why can’t your divorce decree specify how you will divide a pension in divorce? In a nutshell, your divorce decree governs only you and your ex-spouse. To divide a pension, a pension plan administrator must have in hand a court order that applies to them: the QDRO. The process of getting a QDRO can be a cumbersome one, with lots of back-and-forth between lawyers, plan administrators, and courts, to ensure that every detail is correct.
If you or your spouse have a pension, you may be wondering if there are any alternatives to the QDRO process. The good news is that there are; the bad news is that they still require determining the value of the pension. One option, if both spouses have retirement plans that are of roughly equivalent value, is to just let each spouse keep their own plan. If one spouse doesn’t have a pension or other retirement plan, they could take an equivalent amount of other marital property and let the spouse who earned the pension keep it.
One thing is for certain: if either you or your spouse have a pension, you should have the guidance of an experienced family law attorney in your divorce. Retirement plans often make up a large percentage of marital assets, and an error in valuing or dividing retirement plans in divorce can cost tens or hundreds of thousands of dollars. A mistake may not be discovered until many years after the divorce, by which time it is typically too late to correct. Retaining an attorney who is knowledgeable about divorce with pensions can provide you with peace of mind today, and security for the future.