What happens in equitable distribution if one divorcing spouse has a pension?
If one divorcing spouse has a pension, it is usually safe to say that the pension makes up a significant portion of the marital estate. However, a pension is usually one of the most difficult marital assets to value and divide. This is because all defined benefits plans are essentially promises by an employers to pay its employee an annuity upon the employee’s retirement; there is technically no account that can be divided at the time of equitable distribution.
There are two ways in which a pension plan can be distributed: immediate offset or deferred distribution. If there are sufficient assets in the marital estate, the employee-spouse may retain his or her entire pension, and the nonemployee may be compensated with other marital assets, known as immediate offset. However, often there are insufficient marital assets to effectuate an immediate offset distribution of pension benefits. Instead, it can be ordered or agreed that the pension benefits will be divided once they are received after the employee-spouse’s retirement, known as deferred distribution. This distribution is effectuated by way of a qualified domestic relations order (QDRO) for ERISA plans or an alternative domestic relations order (ADRO) for non-ERISA plans.
Pennsylvania law mandates the use of a coverture fraction to determine the marital component of all defined benefit plans, including pensions. If a pension is being distributed by way of deferred distribution, the marital component is determined by dividing the number of months during which the parties were married but not finally separated by the number of months the employee-spouse worked to earn the total benefit. The nonemployee spouse would then receive his or her appropriate percentage of the marital component of the monthly annuity payment owed to the employee spouse upon said spouse’s retirement. The amount owed to the receiving spouse is specified in the QDRO or ADRO as a percentage amount rather than an exact dollar amount.
If the pension is being distributed by way of immediate offset, the marital component of the plan is determined by dividing the number of months the employee-spouse worked to earn the accrued benefit as of the closest possible date to trial or settlement. The nonemployee spouse would then receive his or her appropriate percentage of the marital component of the whole cash value of the pension, in one lump sum. The amount owed to the receiving spouse is specified as a dollar amount. For example purposes, let us say that Wife has a pension with a marital value of $100,000 and that there is to a 50/50 split of the marital estate; this means that in an immediate offset situation, Husband would be entitled to $50,000 to compensate him for his marital interest in Wife’s pension. Let us also say that the parties have sole their home and received $150,000 in sale proceeds with Husband initially entitled to $75,000 and Wife initially entitled to $75,000. To effectuate the immediate offset of Husband’s interest in her pension, Wife can give Husband $50,000 of her proceeds from the sale of the marital residence. At the end of the day, Wife gets $25,000 of proceeds from the sale of the marital residence and she gets to keep the marital portion of her pension free from any claim of Husband, together equaling $125,000. Husband gets his $75,000 of proceeds from the sale of the marital residence and plus the extra $50,000 from Wife to represent his interest in her pension, for a total to Husband of $125,000.
It is necessary to determine the present value of the pension when doing an immediate offset distribution; however, it is not necessary to conduct a valuation to effectuate a deferred distribution as the marital component will be calculated at the time of retirement. However, if the parties go to court, a judge will likely require a valuation be performed so that he or she can determine whether immediate offset or deferred distribution is appropriate. However, the valuing of pensions can be a great source of dispute among divorcing couples because of the complex and subjective assessment techniques employed in valuing these plans. Most parties retain an expert, who will employ a variety of factors and prospective judgment in predicting the marital value of the plan. There is no mathematical precision to the calculation of these benefits and oftentimes two employed by either Husband or Wife will produce two different estimated values.
Although immediate offset is the preferred distribution method, the deferred distribution can be cost-effective to both parties as it does not require the retention of an expert, which can cost thousands of dollars, to presently value the pension. It also avoid the obvious problems with valuing a pension, such as fluctuating interest rates and speculative tax assumption and eliminates the uncertainty surrounding opinions of what the benefit is worth at the time of settlement or trial. The deferred distribution method ensures that both parties assume the risk of future uncertainty, tax consequences, and changes in value in the marketplace. Some family court judges have even begun to move away from immediate offset because they view deferred distribution as the fairest way to distribute retirement assets in light of uncertainties involving the valuation of pension benefits for immediate offset.
If you or your spouse has a pension benefit and are considering a divorce, please contact our experienced attorneys at McMorrow Law LLC for more information on what rights you have regarding the pension. Call 724-940-0100 for your free consultation.