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The Divorce Encyclopedia
Pension Plan


Term Definition Pension Plan - an account or annuity or deferred payment program for employes who leave the company or retire.
Application in Divorce The plans may be qualified, which means they are regulated by ERISA and guarantied by PBGC, or nonqualifed, which means they are not regulated by ERISA and not protected by PBGC.

After the marital home, pension plans are often the most valuable asset many divorcing couple distribute. According to legal observers, pension issues probably generate more appeals and reversals on appeal than any other issue in equitable distribution.

Many divorcing couples do not realize that the pension benefits of a couple ending a long marriage may be greater than the value of house they live it. A frugal couple who lived in one house for the duration of a long marriage may have accumulated retirement benefits greater than the market value of the home.

In general, plans may be what is termed contributory, when both the employer and the employee make contributions to an individual account, or noncontributory, where only the employer makes contributions to a retirement fund.

In addition, a plan may be defined benefit, where each employe is guaranteed a specific benefit, or defined contribution, where the employer’s contributions are specified, but the benefits are not. Vesting, which applies to both pension plans and stock options, means that after a fixed period of time with the employer (often ten years), the employee has the right to receive benefits now or in the future. Most jurisdictions now allow for the distributions of both pension benefits and stock options that are not fully vested.

The 401(k) is a defined contribution plan.

In defined contribution plans, the employee often has more freedom to create an account portfolio of both company and noncompany stock within his or her account. The collapse of Enron provides a drastic lesson in the wisdom of a diversified retirement account portfolio. Thousands of Enron employees who had put all their eggs in the company basket found their retirement savings wiped out when the company stock crashed and become worthless because top management criminally misrepresented the company’s earnings.

The defined benefit pension -- the old-fashioned "company pension" that the Depression-World War II generation expected after years of service to one company -- appears to be going the way of the trolley car and the afternoon newspaper. Fewer and fewer companies offer these plans. At one time, the defined benefit plan, private savings and Social Security made a three-legged stool upon which millions of Americans rested in their retirement years with a reasonable peace of mind. Business now contends that these pensions create unbearable legacy costs, but the obligations of a defined benefit plan already in place cannot be escaped except by bankruptcy.

The three-legged stool that worked so well for survivors of the Depression and World War II apparently will not be avenue for many Baby Boomers, who will finance their own retirements relying on the largely untested payouts of 401(k)s. The success of these retirement vehicles remains to be proven.

Plans are also described as qualified, which means they meet the requirements of I.R.C. 401. This means that none of the employer’s contributions are taxed until they are distributed to him or her.

The beneficiary of a pension general becomes vested in the pension over a period of time. All but four states consider nonvested pension interests that accrue during marriage marital property and subject to distribution, but benefits earned through employment prior to marriage are the separate property of the beneficiary.

Sometimes pensions plans can be very difficult for a layperson to understand. For example, as a result of mergers and acquisitions, some companies compute retirement benefits in the aggregate, and then present the benefit in the form an annuity, funded from a defined benefit plan, a defined contribution plan and an ESOP. Moreover, the terms and conditions of the payout of benefits can be bewildering depending upon whether or not a couple decide on survivor benefits for the nonemployee spouse.

Because the value of a pension plan can be very difficult to determine, lawyers in a contested divorce very often hire actuaries to determine present and future value of these plans.

In a divorce, pension benefits are often distributed via a QDRO -- a Qualified Domestic Relations Order, which requires a court order. A QDRO directs a retirement plan administrator to distribute the benefits of a retirement plan according to the percentages agreed upon by the parties and approved by the court.

In a divorce the distribution of pension benefits is particular consider to the stay-at-home mother. More than twice as many men as women have retirement benefits, and the benefits for men are generally much larger than those for women. Because of this, women very often are in a position to trade off their share of spousal retirements for other assets, but care should be taken in doing this. In a 1997 ruling, the Louisiana Court of Appeals decided that the unmatured pension of a wife, which was awarded to her, was "so different in kind and character" from marital home, which was awarded to the husband, that although the pension and house were "roughly equal" the distribution was inequitable, and "could not be viewed as having equal net value." The court said that the was marketable property that could easily be converted to cash; the pension was not marketable and had limited heritability.

One of "the most frequently litigated questions in the area of property distribution" concerns increases in pensions after the divorce decree. It is easy to see why. The employee spouse contends that the increase happened after the marriage, so it is his or her separate property; the nonemployee spouse counters that the increase was earned during the years of the marriage, so it should be subject to distribution.

Courts have supported both sides of this argument.

In general, some courts have approved sharing of the increase because "community efforts contribute to such increases." Other courts have held that the reason for the increase determines whether is it marital or separate. Other courts have asserted that the nonemployee’s share should be based on benefits at the time of distribution. Still other courts have prohibited including expected postdivorce increases in the calculation of the present value of a pension.

Most disputes happen after the divorce when distribution is deferred. In order to avoid disputes after the divorce, the parties can clearly specify in the divorce agreement whether any postdregree increases accrue to the nonemployee spouse when the pension distribution is deferred until the retirement of the employee spouse.

See also Defined Benefit Plan; Defined Contribution Plan; ERISA; ESOP;QDRO.

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