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The Divorce Encyclopedia
Pension Rights

Term Definition Pension Rights - a major portion of the marital estate.
Application in Divorce For many couples, pensions, his and increasingly hers, are a major portion of the marital estate. With the marital home, pensions are a major issue in equitable distribution, and disputes about them frequently lead to appeals in divorce actions.

In general, five facets of pension rights must be considered in equitable distribution. These are 1) classification, 2) valuation, 3) distribution, 4) qualified domestic relations orders (QDROs), and 5) miscellaneous areas of contention, including postdecree increases, Social Security benefits and "double dipping."

In a divorce, pension rights acquired during a marriage are classified as marital property. This is true even when the pension is noncontributory and the employee makes no contribution to it during his years of employment. Almost all states consider an unvested pension as marital property. The retirement component of a disability pension is marital.

The pension rights of spouses depend on whether they divorce in an all- property state or equitable distribution jurisdiction.

In equitable distribution jurisdictions, premarital pension rights must be separated from those which are marital. In these cases, courts use what is called a coverture fraction, which is also known as the time rule. In this, a mathematical formula used to calculate the percentage of a pension distributed to a noncontributory spouse (usually a wife). In a coverture fraction, the denominator is the employed spouse’s total earning period. The numerator is the married years of earning the benefit. In this routine, the ultimate benefit times the coverture fraction times the percentage attributable to the alternate payee determines the amount paid to the noncontributory spouse.

Courts also consider the active and passive appreciation of premarital and marital pension rights in classifying pension benefits.

The date chosen to value the pension can have a dramatic impact on the valuation. This is particularly true for a defined contribution pension, which is the sum of invested funds.

The value of a pension plan can be very difficult to calculate, so the parties in a contested divorce very often hire actuaries to determine present and future value of these plans. The present value of a pension is the present-day value of the plan. In the valuation of pensions, some jurisdictions make allowances for future taxes that the owner may eventually face.

Two basic methods exist for distributing pension benefits. The first is the present value method. Also called the immediate offset, the pension is awarded to the employee owner spouse, and the nonemployee spouse receives other marital property. The second method, which is called deferred distribution, (the so called "if, as, and when" method), the nonemployee spouses receives the benefits when the employee spouses does.

Courts are divided about the sharing of postdivorce pension increases, particularly for deferred distribution pensions. Predictably, when a dispute arises, the employee spouse (often the man) argues that the increase happened after the marriage, and the sharing spouse (often the women) asserts that the increase happened as a result of years of employment during the marriage. Courts have taken different positions about the sharing of postdivorce increases.

An immediate distribution of pension rights is the preferred route in most jurisdictions. This method makes for a clean break between the parties and it minimizes court involvement in the future. However, some jurisdictions hold that deferred distribution makes for a more equitable settlement because both spouses share in future increases.

Dividing retirement benefits requires a court order, and pensions regulated by ERISA may be distributed via a QDRO. When the distribution of pension benefits is deferred, the parties may use a QDRO, a court ruling stating that a portion of one spouse’s pension is to be awarded to the other spouse as part of the equitable distribution of the marital assets. 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.

Sometimes when couples defer the distribution of retirement benefits, disputes arise later because the nonemployee spouse contends she should receive a share of subsequent increases. This is why property settlement agreements should be clearly and carefully written, particularly when the agreements involve a QDRO.

Women, who generally live longer than men, should be mindful that they may receive less in the division of a defined benefit pension plan than their former spouses.

A spouse’s Social Security benefits are that person’s separate, indivisible property. Courts, however, sometimes consider a husband’s Social Security when dividing a couple’s respective pensions.

Sometimes the distribution of a pension raises arguments about "double dipping," a term used to describe the alleged unfairness that results when a spouse receives property in equitable distribution that is also counted as a source of income for calculating alimony or support. This happens in property distributions where, for example, one spouse twice benefits from the classification of pension -- "first for a share of equitable distribution, and second for inclusion in [a spouse’s] cash flow determination of an alimony base."

Some state and local government plans make a distinction between surviving spouse and a surviving ex-spouse.

Depending upon the jurisdiction, the marital estate does not include any portion of the premarital pension rights earned by the worker spouse or the passive appreciation of these rights. Other jurisdictions apportion the premartial and marital portions by comparing the value of the plan at the beginning and the end of the marriage or the length of the premarital participation against the length of the marital participation.

In case of death during a divorce action, the benefits of an ERISA-qualified pension automatically go the surviving spouse.

In general, a spouse cannot waive her rights to an ERISA-qualified pension in a prenuptial agreement. (ERISA explicitly requires that a spouse waive rights to a qualified joint and survivor annuity and a qualified preretirement annuity by way of written and notarized statement witnessed by the retirement plan’s representative. These provisions and others are designed to prevent the employee spouse from unilaterally cutting off a spouse from benefits rightful hers.) Moreover, both federal and state courts are divided about whether a spouse can waive ERISA-qualified pension rights in a property settlement agreement.

See also Alternate Payee; Defined Benefit Plan; Defined Contribution Plan; Coverture Fraction; "Double Dipping"; ERISA; ESOP; QDRO; Pension Valuation; Present Value.

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