Pensions and Retirement Assets

Pension and retirement benefits acquired during the course of a marriage are generally distributable between both of the parties upon divorce. Retirement benefits come in many forms, and therefore there are many rules governing how these assets are divided. Some assets can be divided immediately at the time of the divorce, by simply liquidating an investment account or withdrawing money from an employer-sponsored savings plan. Other accounts cannot be liquidated until the age of retirement, or some other age limit. There may also be severe tax consequences and penalties for early redemption.

Generally, the person is not required to divide pension or retirement funds which were accrued before marriage. Likewise, he is not required to divide retirement assets contributed to a retirement fund after the parties separated or filed for divorce (depending on what state law applies). However, if a retirement account increases or decreases in value while a divorce case is pending, both parties may enjoy the benefit of the increase or suffer the detriment of the decrease, even if they were separated, while the matrimonial case was pending.

If one party wishes to “buy out” the other party by paying her a portion of the pension benefits, it may be necessary to determine the present value of pension funds that would not ordinarily be available until the age of retirement. In this regard, it is sometimes necessary to engage the services of an actuary or another financial expert to assist in determining the value of a pension benefit for distribution purposes. In some cases, parties agree to simply waive their rights to each other’s retirement benefits. It is also possible for one party to give up her share of her husband’s pension in exchange for a higher amount of alimony or support, or in exchange for a greater portion of the property.

One of the things that makes pension and retirement issues complicated is a federal law which governs qualified pension plans. The federal law is known as the Employee Retirement Income Security Act of 1974 (ERISA). This is the federal law that contains many of the procedures for dividing retirement funds and making sure that each recipient is taxed proportionately on the share of retirement money that he or she will be receiving. ERISA was drafted in such a way as to prevent a pension plan participant from assigning his interest in the pension plan to another person.

However, the Act also introduces the idea of a Qualified Domestic Relations Order (QDRO) as one of the few limited exceptions to the anti-assignment and alienation rules contained in ERISA. A QDRO may assign some or all of a participant’s pension benefits to a spouse, a former spouse, child or other dependent to satisfy family support or marital property obligations. In order for a QDRO to become a qualified order, a domestic relations order must first be approved by a pension plan administrator. The formalities of draftsmanship for a QDRO may vary from case to case, from plan to plan, and from time to time.

The way a QDRO works is by setting up an “alternate payee” who, by virtue of the divorce judgment or property settlement agreement, is permitted to receive all or a portion of the benefits payable to a participant under his pension plan. Although ERISA delineates a number of technical requirements, QDRO’s must, at a minimum, contain a name and last known address of a participant and each alternate payee, the name of each plan to which the order applies, the dollar amount or percentage, or the method of determining the amount or percentage, of the benefit to be paid to the alternate payee, and the number of payments and time period to which the order applies.

A QDRO cannot provide an alternate payee any benefit or right not otherwise provided under the plan. Nor can the plan be required to provide for increased benefits, or to pay benefits in the form of a qualified joint or survivor annuity for the lives of the alternate payee and his or her subsequent spouse.