Dividing Retirement Plan Assets in a Divorce

The first or second largest asset in a marital estate is one or both spouses' retirement plans. Therefore, a mistake made in dividing these assets in a divorce could be very costly for one of the spouses.

A Poorly Worded PSA

The Property Settlement Agreement (PSA) sets forth the agreement between the parties with regard to each of the assets in the marital estate. If the PSA provision in connection with retirement plan benefits/accounts is not specific, the implementation of that provision may not result in what was meant by the provision. For example, if the provision states that the non-retirement plan participant spouse (known as the Alternate Payee or AP) gets 50% of the participant's benefit/account, the interpretation could be:

• 50% of the benefit/account accrued as of the date of the complaint.
• 50% of the benefit/account in place when the participant spouse is paid the benefit/account.
• 50% of the benefit/account that accrued during the marriage, knowing that a portion of the benefit/account came with the participant spouse into the marriage.

Each of these interpretations can produce vastly different results. For example:

• Account at Date of Marriage (D of M): $50,000
• Account at Date of Complaint (D of C): $200,000
• Account at Date of Distribution: $250,000
• Years in Plan at D of C: 25
• Years in Plan at D of M: 15

Based on these assumptions, the share to the AP is:

$100,000: 50% x $200,000, or

$125,000: 50% x $250,000, or

$40,000: 50% (10 ' 25) x $200,000

Retirement/Benefit Accounts

What happens when a participant spouse came to the marriage with a retirement benefit/account? If the non-participant spouse, or her advisers, is not aware of the different methods of properly reflecting that pre-marital benefit/account, the selection of method could be less equitable for the non-participant spouse. For example, one or more of the methods available to reflect that pre-marital asset will deliver a share of the investment gains earned during the marriage by the pre-marital benefit/account to the non-participant spouse. If such a method is not set forth in the PSA, or the Qualified Domestic Relations Order (QDRO) (an Order from the court stipulating as to how and when retirement plan assets are divided in a divorce), the non-participant spouse will get less than an equitable share.

For example, the share to the AP in the example on page 6 could be $75,000 (50% x [$200,000 amount at date of complaint ' $50,000 amount at date of marriage]), instead of $40,000. Both methods attempt to reflect that part of the account that accrued during the marriage. There are other methods.

Selection of Time

How important is the selection of the time to receive a share of the benefit/account? If the participant spouse has earned a retirement benefit payable at some future retirement date, the non-participant spouse, or her advisers, should test to determine if the sharing should be done now (at the time of the complaint), or at that future retirement date. It is not unusual to find that State Law will allow for sharing the benefit in the future. More importantly, the portion of that future benefit (which will be larger than it is now as a result of increased compensation and service in the benefit formula), pro-rated for the portion of that benefit earned during the marriage, may be larger than the portion of the benefit to be shared now (at the time of the complaint).

For example:

• Pension benefit accrued as of D of C*: $3,000/month
• Pension benefit payable as of retirement date:$6,600/month
• Years of Marriage: 20
• Years in the Plan: 30

Will the share to the AP be $1,500/month, i.e., 50% x $3,000 or $2,200/month, i.e., 50% x (20 ' 30) x $6,600?

*All accrued during the marriage.

The calculations above determine a monthly retirement benefit share to the non-participant spouse, payable when the participant commences his/her benefit. In some cases, the divorcing parties do not want to wait until that future benefit commencement date to fulfill the sharing. In that case, a determination must be made now as to the value of that shared benefit payable in the future. That valuation is typically done by an actuary, where the actuarial assumptions used by the actuary in the calculation must be agreed to by the parties and their advisers.

For example, in the unlikely event that the divorcing couple has only two assets ' their home, and a participant spouse pension, the valuation process could result in the following:

• Value of Home: $500,000
• Value of Pension: $500,000

One possible division of the marital estate could be ' non-participant spouse keeps the home; the participant spouse keeps the pension. (See article on page 3 regarding potential tax consequences of such a division.)

These and other important retirement plan division methods and information are set forth in a newly published guide ' “Dividing Retirement Plan Assets in a Divorce” ' which is accessible at www.divorcepensionrights.com.

Special Issues

1. IRAs: Do not need a QDRO, but do need a court order.
2. Same Gender Marriage (SGM): As a result of the recent Supreme Court decision in Windsor , SGM spouses have the same rights as spouses in a traditional marriage, and the same rights in a divorce. Most importantly, the legitimacy of the SGM is determined by the state where the marriage ceremony took place, not the state of domicile.
3. Special Note: Some courts have attributed marital rights to domestic partners.
4. Military and Other Government Plans:
5. These must follow very rigid rules in preparing the domestic relations order (DRO).

Howard M. Phillips is a pension actuary. He is a past president of Consulting Actuaries Incorporated and a past president of the American Society of Pension Professionals and Actuaries (ASPPA). Mr. Phillips has earned a Fellowship in the Society of Actuaries; a Fellowship in the Conference of Consulting Actuaries; is a member, and past Board member, of the American Academy of Actuaries and ASPPA; and is the author of “Dividing Retirement Plan Assets in a Divorce.”

The first or second largest asset in a marital estate is one or both spouses' retirement plans. Therefore, a mistake made in dividing these assets in a divorce could be very costly for one of the spouses.

A Poorly Worded PSA

The Property Settlement Agreement (PSA) sets forth the agreement between the parties with regard to each of the assets in the marital estate. If the PSA provision in connection with retirement plan benefits/accounts is not specific, the implementation of that provision may not result in what was meant by the provision. For example, if the provision states that the non-retirement plan participant spouse (known as the Alternate Payee or AP) gets 50% of the participant's benefit/account, the interpretation could be:

• 50% of the benefit/account accrued as of the date of the complaint.
• 50% of the benefit/account in place when the participant spouse is paid the benefit/account.
• 50% of the benefit/account that accrued during the marriage, knowing that a portion of the benefit/account came with the participant spouse into the marriage.

Each of these interpretations can produce vastly different results. For example:

• Account at Date of Marriage (D of M): $50,000
• Account at Date of Complaint (D of C): $200,000
• Account at Date of Distribution: $250,000
• Years in Plan at D of C: 25
• Years in Plan at D of M: 15

Based on these assumptions, the share to the AP is:

$100,000: 50% x $200,000, or

$125,000: 50% x $250,000, or

$40,000: 50% (10 ' 25) x $200,000

Retirement/Benefit Accounts

What happens when a participant spouse came to the marriage with a retirement benefit/account? If the non-participant spouse, or her advisers, is not aware of the different methods of properly reflecting that pre-marital benefit/account, the selection of method could be less equitable for the non-participant spouse. For example, one or more of the methods available to reflect that pre-marital asset will deliver a share of the investment gains earned during the marriage by the pre-marital benefit/account to the non-participant spouse. If such a method is not set forth in the PSA, or the Qualified Domestic Relations Order (QDRO) (an Order from the court stipulating as to how and when retirement plan assets are divided in a divorce), the non-participant spouse will get less than an equitable share.

For example, the share to the AP in the example on page 6 could be $75,000 (50% x [$200,000 amount at date of complaint ' $50,000 amount at date of marriage]), instead of $40,000. Both methods attempt to reflect that part of the account that accrued during the marriage. There are other methods.

Selection of Time

How important is the selection of the time to receive a share of the benefit/account? If the participant spouse has earned a retirement benefit payable at some future retirement date, the non-participant spouse, or her advisers, should test to determine if the sharing should be done now (at the time of the complaint), or at that future retirement date. It is not unusual to find that State Law will allow for sharing the benefit in the future. More importantly, the portion of that future benefit (which will be larger than it is now as a result of increased compensation and service in the benefit formula), pro-rated for the portion of that benefit earned during the marriage, may be larger than the portion of the benefit to be shared now (at the time of the complaint).

For example:

• Pension benefit accrued as of D of C*: $3,000/month
• Pension benefit payable as of retirement date:$6,600/month
• Years of Marriage: 20
• Years in the Plan: 30

Will the share to the AP be $1,500/month, i.e., 50% x $3,000 or $2,200/month, i.e., 50% x (20 ' 30) x $6,600?

*All accrued during the marriage.

The calculations above determine a monthly retirement benefit share to the non-participant spouse, payable when the participant commences his/her benefit. In some cases, the divorcing parties do not want to wait until that future benefit commencement date to fulfill the sharing. In that case, a determination must be made now as to the value of that shared benefit payable in the future. That valuation is typically done by an actuary, where the actuarial assumptions used by the actuary in the calculation must be agreed to by the parties and their advisers.

For example, in the unlikely event that the divorcing couple has only two assets ' their home, and a participant spouse pension, the valuation process could result in the following:

• Value of Home: $500,000
• Value of Pension: $500,000

One possible division of the marital estate could be ' non-participant spouse keeps the home; the participant spouse keeps the pension. (See article on page 3 regarding potential tax consequences of such a division.)

These and other important retirement plan division methods and information are set forth in a newly published guide ' “Dividing Retirement Plan Assets in a Divorce” ' which is accessible at www.divorcepensionrights.com.

Special Issues

1. IRAs: Do not need a QDRO, but do need a court order.
2. Same Gender Marriage (SGM): As a result of the recent Supreme Court decision in Windsor , SGM spouses have the same rights as spouses in a traditional marriage, and the same rights in a divorce. Most importantly, the legitimacy of the SGM is determined by the state where the marriage ceremony took place, not the state of domicile.
3. Special Note: Some courts have attributed marital rights to domestic partners.
4. Military and Other Government Plans:
5. These must follow very rigid rules in preparing the domestic relations order (DRO).

Howard M. Phillips is a pension actuary. He is a past president of Consulting Actuaries Incorporated and a past president of the American Society of Pension Professionals and Actuaries (ASPPA). Mr. Phillips has earned a Fellowship in the Society of Actuaries; a Fellowship in the Conference of Consulting Actuaries; is a member, and past Board member, of the American Academy of Actuaries and ASPPA; and is the author of “Dividing Retirement Plan Assets in a Divorce.”