While not often discussed in terms of their lump-sum value, pensions are frequently a highly valuable asset, which can have a tremendous impact upon a client’s income at retirement. Pensions are a promise to pay from the employer to the employee. They are governed by the plan document and do not have to follow QDRO instructions if those instructions violate the plan document. Since there are many types of pensions, there are some key considerations and questions when addressing a pension benefit in a divorce agreement:
- The pension portion that is considered a marital asset typically does not include the years accrued before the marriage or after the divorce. This creates some complexity in determining what is an equitable distribution of the payout. Is it a fixed dollar amount, a percentage, or some other calculation that would adjust as one participant continues to work at the company? For example a couple that has been married 20 years may agree that the pension is to be divided 50-50 at the time of retirement. However, if one participant works another 10 years for the company after retirement, Is he or she is giving up 50% of an asset that they was only a marital asset for 20 out of the 30 years of benefit accrual?
- What is the present value of this future obligation? If this can be agreed upon, clients can use other assets to offset their share of the pension. In this scenario, a non-participant spouse can get assets today and not have to wait 5, 10, 20+ years to receive his or her share.
- If the participant dies before starting the pension benefit, is there any obligation to pay the ex-spouse. If the non-participant spouse dies, is there a beneficiary on his/her portion of the payment?
- Can the spouse of the pension participant collect a benefit if the participant has not yet reached retirement age or has voluntarily continued to work beyond that age?
- Can the pension be separated into 2 individual accounts with a QDRO? Under this option the non-participant spouse actually gets his/her own account and becomes a participant. This will allow the participant spouse to continue to accrue benefit with additional years of work, and minimizes future confusion and conflict with regards to pension payout amounts.
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