Pension in divorce Challenge.
Pension in divorce can be a complex problem to resolve. This is mainly because it is difficult to place value on the future value of a pension. Valuing a pension for divorce usually depends on the type of benefit plan. The first step in valuing a benefit plan is to identify the type of plan.
Pension in divorce – identifying employee benefit plans
The first step in handling pension in divorce is identifying employee benefit plans.
It’s difficult even for an employee spouse to identify an employer-provided plan. Nonemployee spouse are also less likely to know about their partner’s benefits. Therefore, it is important to obtain information about the spouses and one way to do it is by using an employment timeline. An employment timeline helps in ensuring no plan is overlooked.
Requesting information directly from a plan administrator is an effective way of identifying an employee benefit plan. Plan administrators will conduct required research and make you aware of all the plans available including the overlooked plans such as National Guard or military reserve duty.
In some circumstances, it is also possible for a practitioner to identify the party’s plan based on their nature of employment. For instance, a county employee will be covered under the county’s retirement plan, the California Public Employees’ Retirement system or both.
Unlike government and union plans, private company retirement plans are hard to identify without the assistance of the employee. This is because private companies sometimes go through lots of changes such as going out of business, changing business names, merging with other companies and/or changing location.
Once all the benefit plans or accounts covering the employee spouse have been gathered it’s recommended to list them down chronologically. This should be the case for all plans including those that have been terminated and funds transferred. Listing assists in tracing property as well as identifying provisions in case of mergers.
What to Consider in Determining How to Divide Benefits in pension in divorce situation
(1) Pension in divorce – Evaluating qualitative and quantitative elements
When deciding how a community benefit, for example, an interest in a retirement plan is to be divided between spouses, you must consider its qualitative and quantitative elements.
Quantitative elements entail the amount of the benefits payable based on estimates in the event there are future payouts, or actual numbers when benefits are currently payable or immediately available for distribution. Qualitative elements, on the other hand, entail plan features including eligibility for distributions and the payment of benefits upon the death of either party.
In case the council decides to consider only the amount of payable under a benefit plan, the payments are assigned under the domestic relations order. But if the plan does not permit payments to the nonemployee until the other party retires, the nonemployee may consider other methods of dividing benefits.
Employee benefit plans differ in terms of funding methods, computation of benefits, distribution options, survivor and death provisions among others. While some plans may be similar such as 401(k), it is advisable to approach each plan based on its own terms and policies. You may become acquainted with a plan and its features by checking its summary plan description.
(2) Pension in divorce – Benefit division methods
There are three ways to divide community assets under an employee benefit plan. They include a buy-out, equalization, or in-kind division under a QDRO.
In some cases, division of community property may be straightforward. For instance, if both the wife and husband hold separate 401(k) accounts each with an equal community property value, an equal division would provide each party to retain his or her respective account and waive all rights to the other party’s account-assuming all aspects of the accounts are the same.
Another clear example is whereby an old woman with no employment experience outside the home is entitled to a share of her ex-spouse’s private defined plan. The husband is in poor health and both have no insurance other than the retirement plan. Since the community assets are insufficient for a buy-out or equalization, the pension plan will be divided using a QDRO by creating a separate account for her.
Sometimes, the retirement plan may require an appraisal. If there is a possibility of a buy-out or equalization involving a defined benefit plan, you may have to hire an actuary to estimate the prevailing value of the accrued benefit.
(3) Pension in divorce Types of Private Plans and Information Needed to Divide Them
Most benefit plans calculate the employee spouse benefits based on the years of service credit and salary. In such cases, a time rule-based formula is used to determine the community and separate property interest in the plan.
Another formula used is the unit benefit formula that determines the benefit payable to be based on compensation. The cash balance plan is another benefit plan which provides that a participant’s benefit is determined by the value of a fictitious account from the employer contributions based on a flat percentage salary plus interest credits.
In order to make a choice for a benefit formula, the following information should be obtained:
- Date of the employee’s hire;
- Date of the employee’s entry into the plan;
- Total years of service credits as of the current date;
- Total years of service credits earned between the date of marriage and date of the parties’ separation
- Benefit statement at or nearest to the parties’ date of separation; and
- Most current benefit statements.
In the event an employee is retired and already receiving payments some additional information is required including;
- The date payments commenced;
- The amount of each monthly payment since benefit payments commenced;
- The form of distribution payable to the employee participant (i.e., single life annuity, joint and survivor annuity, period certain annuity, or instalments);
- The name of any beneficiary under the form of distribution option payable; and
- Whether the benefit payable is based on the employee participant’s disability.