Pension plans vary considerably. They are often very complex. When dividing a pension in a divorce, there are options that should be fully understood and then decided upon. You should obtain literature from the plan administrator describing the plan and your options. This is a wise area for consultation with a representative of the organization that provides and administers the pension. It may also be helpful to consult with a Certified Divorce Financial Analyst, a family law attorney, and/or a QDRO specialist.
Pensions often have survivor and death benefits. The community property portion of the pension normally includes these survivor and death benefits.
Pensions are a future stream of income. Therefore, it’s not obvious what a pension is worth in today’s dollars. The organization providing the pension will rarely be willing or able to tell you this.
California law views a pension as an asset. But without knowing the value of the pension in today’s dollars, it’s impossible to accurately stack it up against the values of the other assets in the divorce. It’s therefore standard practice in divorce to have an actuary calculate the present value of the pension.
When doing so, the actuary will normally also calculate the community and separate property interests in the pension.
Here are some key things to find out about the pension:
What is the earliest retirement date available under the plan?
When is the participant eligible to retire with unreduced benefits?
Are there early retirement subsidies?
Is there a guaranteed cost-of-living adjustment (COLA) or are there “extra” benefits provided?
What are the survivor benefits?
What are the benefit election options?
Will a divorce deprive the non-employee spouse of any medical benefits currently provided?
Pension Options for Division
There are two main ways that most pensions can be divided:
- the separate interest method and
- the shared interest method
Briefly, the separate interest method creates a separate account for the non-employee spouse within the pension plan. The shared interest method leaves just the employee’s account and the non-employee spouse’s benefits come from it. It is very important to understand (before creating the QDRO) the different options available for the pension you are dividing and the pros and cons of each.
Separate Interest Method
Here are some features normally associated with the separate interest method:
- The non-employee spouse can make independent decisions about the timing and form of pension benefits.
- The non-employee spouse may begin receiving payments at the employee spouse’s earliest retirement age.
- The non-employee spouse can take their pension benefits in any form available under the plan.
- The pension benefits for the non-employee spouse are based on their own life expectancy.
- If the employee spouse dies once payments to the non-employee spouse have commenced, it has no effect on the non-employee spouse’s continued receipt of payments.
- If the plan allows, the non-employee spouse may elect beneficiary(s) of their own choosing for their benefits.
- The non-employee spouse must still be named a beneficiary on pre-retirement survivor benefits of the employee spouse.
Shared Benefit Method
Here are some features normally associated with the shared benefit method:
- Everything is controlled by the employee spouse.
- The non-employee spouse must wait until the employee spouse retires before receiving pension benefits.
- When the non-employee spouse dies, their pension benefits automatically revert back to the employee spouse.
- Benefits are based on the life expectancy of the employee spouse.
- If the employee spouse dies, payments to the non-employee spouse stop, unless they are entitled to receive pre-retirement or post-retirement surviving spouse benefits.
Often the employee spouse doesn’t want the soon-to-be ex-spouse as the pension beneficiary. Some alternatives are to:
- obtain a separate life insurance policy on the employee spouse’s life with the non-employee spouse as the beneficiary and owner.
- use the separate interest method of division (because then only pre-retirement survivor benefits would be a concern).
- obtain a lien against pension holder’s estate for an agreed-upon amount of survivor benefit.
A defined benefit (pension) plan must offer survivor benefits to the spouse of a vested employee who dies before retirement age. The surviving spouse is entitled to payments known as a qualified pre-retirement survivor annuity. The annuity begins paying to the surviving spouse when the deceased employee spouse would have reached the earliest retirement age provided for in the plan.
An ex-spouse can be treated as the employee spouse’s current spouse for the purpose of receiving survivor benefits. But a provision to that effect must be included in the QDRO, or else the benefits will be lost.
If a pension has death benefits, the non-employee spouse may want to be continued under the plan to keep these benefits. It’s usually better, however, to value this part of the plan separately and replace it with an annuity or life insurance of equal value. The cost of this is usually relatively small.