Basic Pension Principles
Family law and divorce is an aspect of the legal profession that is intensely personal. Clients involved in family law disputes need both personal and professional support to help them through a difficult, highly emotional time. They also need calm and reasoned decision-making. This is particularly true in marital community property disputes in which a pension must be divided.
Two Ways to Divide Retirement Plans
Each way of dividing benefit plan rights has pros, cons, and challenges for the attorneys, judges, mediators, Pro Se, and Pro Per parties involved who must guide them through the financial confusion of divorce.
Divorcing spouses' shared rights under a retirement plan can be divided in two ways:
- The Immediate Offset Method. By using the immediate offset method, under which the marital portion of retirement benefits is appraised and used to offset other assets in the marital dissolution action.
The immediate offset method's main disadvantage is that it requires a price tag to be put on a benefit that is contingently payable – if vesting occurs, the benefit will prove to be valuable, whereas if a segregation of service, other than perhaps disability, occurs the benefit will be almost worthless. This requires lawyers to rely on an actuarial experts opinion of the benefit's "expected" (average) future value. Even when actuarial valuations are fair estimates of average benefit values, they often prove to be poor estimates of benefit values in individual cases. In a divorce, use of an actuarial appraisal of a benefit may result in one spouse receiving a windfall at the expense of the other.
OR - The Deferred Distribution Method. By using deferred distribution method via qualified domestic relations order (QDRO), or its equivalent for military or other non-ERISA plans.
A QDRO directs a retirement plan administrator to pay benefits to the plan pensioner's ex-spouse, who is referred to as the QDRO's alternate payee. A well-designed QDRO can guarantee that the alternate payee will receive the share of marital benefits that the court intended – regardless of unforeseen events such as the plan member's untimely death before any benefits become payable. A sound QDRO document will apportion the benefits in an appropriate way, will have death benefit protection built in, and may address other contingencies as well to ensure that the QDRO performs as expected.
Lawyers who work on divorces that involve QDROs have been magnets for a cranky client, because an inaccurately designed QDRO can be a real disaster. Lawyers who are not experienced with them should consider hiring Pension Evaluators® & QDROs of Troyan Inc® & Associates Group to help write appropriate QDROs, especially in cases in which a standard QDRO offered by a retirement plan either seems unsafe to use or does not meet a clients' particular needs. Delegating a QDRO's design and drafting to a qualified specialist not only reduces an attorney's exposure to liability but also often has another advantage: a good QDRO specialist knows how to tailor a QDRO to meet the requirements of a difficult case.
Even so, the immediate offset method does have two advantages over using a QDRO:
- It allows the plan member to keep his or her entire pension intact.
- In many cases, it makes possible an agreeable division of assets by putting another major asset on the bargaining table.
Pension Plan Benefits
Pension plans:
- Reward employees for long and faithful service on the job
- Help companies attract and retain good employees
- Offer attractive tax benefits to employers and employees
Pensions as Marital Property
A pension is marital community property because it is a form of deferred wage of the employee. Other key pension principles include the following:
- When the marriage ends by divorce and marital property must be divided, the deferred wage aspect of a pension becomes important for consideration as an asset subject to allocation between the husband and wife.
- A good working definition of the present value of a pension is that it represents a sum of money today that will grow with investment results to provide a lifetime pension starting at a future date (if the person lives to the pension starting date).
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