Divorce Law & Pensions

The classification and division of pension plans in divorce can be a complicated issue.

Pension plans are the most common form of defined benefit plans, which guarantee a monthly or yearly benefit to the participant upon retirement from the employer. Due to the ongoing nature of their acquisition and the deferred receipt of benefits, pension valuation and distribution can be one of the most complicated facets of a divorce case.

Classification as Marital or Separate

The equitable distribution or community property laws of any given state will govern how to classify a given asset as either marital or separate. Pension plans may constitute mixed assets, consisting of both marital and separate components. To establish the percentage of a party's pension that is marital, or the "coverture fraction," courts generally take the months the party worked for the employer during marriage and divide that figure by the number of months the party worked for the employer altogether. This fraction is critical in establishing the value of the pension.

Valuation of the Plan

Unlike a 401(k) or IRA, parties cannot always ascertain the total value of their pension plans by looking at a statement. Each state has its own mechanism for valuing a pension plan, which may be expressed in the equitable distribution or community property statutes or in case law. If the plan contains no lump-sum value or transfer option, a financial expert may be needed to establish the present value of the party's future benefit. This generally involves a complex calculation based upon factors that include the coverture fraction, the participant's expected future benefit, the earliest retirement date, the participant's age and the participant's life expectancy.

Distribution of the Plan

Depending on the nature of the marital estate on the whole, a court may distribute a party's pension entirely to that party and move around other assets and debts in order to achieve a desired division of the estate. If a court cannot distribute the pension intact, it may require the entry of a Domestic Relations Order (DRO) governing the monthly payment to be made to the non-participant spouse out of the participant's benefit. Some pension plans allow for a lump-sum transfer to the non-participant spouse, and a court may elect to distribute the pension in this manner rather than making the non-participant wait until the other party retires or awarding her a cut of the participant's monthly benefit that may disappear when the participant dies.

When the Participant Has Already Retired

When the participant spouse has already retired and is receiving pension benefits, parties can sometimes sidestep thorny valuation issues by applying the coverture fraction to the pensioner's benefit and dividing it via a DRO to be entered and activated immediately. Present value calculations are based partly on speculation; a pensioner may die earlier than expected, inflation may spiral out of control or the employer may go bankrupt and wipe out its pension obligations. Parties can avoid these contingencies when they are able to immediately divide the monthly benefit and move on to equitably or equally distributing the rest of the marital estate.

References

• Pension Analysis Consultants, Inc: "A Primer on Pension Valuation in Divorce": Mark K. Altschuler.
• Vecon: "Valuing Pensions for Divorce": Timothy C. Voit.
• Divorceplanner: Pension Valuation Methodology.