Dividing Pensions In Divorce: What You Need To Know
All property acquired during the marriage is subject to division in a divorce. Pensions are considered property. It is important to understand the process involved in dividing pensions in divorce.
What Is A Pension?
A pension is a private retirement plan sponsored by an employer. Today, almost all pensions are provided by the government and unions. Pensions pay a monthly annuity to the employee upon retirement.
An employee who is eligible for a pension benefit is called the Participant; they are the “participant” in the pension plan. The spouse who has a claim to a portion of the pension is called the Alternate Payee. Dividing pensions in divorce can be a tricky matter. It must be done with full knowledge of your options and the potential pitfalls to avoid.
Is A Pension Divided Equally?
Only the marital portion of the pension is subject to division when dividing pensions in divorce. For example, if Sally had been contributing to her Federal Civil Service Retirement Service (CSRS) pension plan for 20 years, and had been married to her husband for 15 of those years, then only 3/4 of Sally’s pension would be considered marital and subject to division.
It does not matter if the participant is still working or is retired and collecting their benefits. If the Participant acquired any portion of the pension benefit during the marriage, that portion, no matter how small or large, will be subject to division.
How Is A Pension Divided?
A pension benefit must be divided by Court Order. These Orders are called by various names, such as Qualified Domestic Relations Order, or QDRO, Court Order Acceptable for Processing (CSRS), a Military Qualified Court Order (Armed Forces).
A properly drafted Court Order has many benefits and protections for the Alternate Payee, such as:
- Ensuring Cost of Living (COLA) increases
- Ensuring that the benefit will continue should the Participant pre-decease the Alternate Payee once the benefits begin to be paid
- Ensuring that the Alternate Payee will receive the benefit should the Participant die before the benefits are scheduled to begin
How Is The Pension Benefit Paid Once It Has Been Divided?
Finally, there are two common ways to pay the Alternate Payee her share of the pension benefit. One way is to simply “QDRO” the pension benefit, meaning that once the pension is in pay status, the Alternate Payee will get a separate monthly annuity from the Plan reflecting his or her share of the marital portion.
For example, in Sally’s case, the marital portion of the pension was 3/4. If Sally begins to receive a monthly pension check of $2,000 upon her retirement, then 3/4 of this check would be considered marital property, equalling about $1,500. Sally’s husband would then be entitled to 1/2 of this amount, or $750 per month from Sally’s monthly annuity.
Another way of dividing pensions in divorce is to calculate the Lump Sum Net Present Value of the benefit to the Alternate Payee and then pay this out of other marital assets. For example, we know Sally’s husband has a potential monthly benefit of $750. If his life expectancy is 20 years, the total benefit paid to him during his lifetime would be $180,000 (not including COLA’s which may also apply). This sum is then “discounted” to determine the value of this sum in today’s dollars.
A simple financial calculation shows that the Net Present Value of this benefit is about $82,000 discounted at 4%. Sally and her husband could then choose to pay Sally’s husband $82,000 out of other existing assets, thereby waiving his claim to Sally’s monthly pension check.
This simple overview should give you a good idea as to your options and the pitfalls to avoid if you are faced with the division of a pension benefit in a divorce.