One of the axioms of a divorce is the belief that all assets owned by either party are divided 50/50. Technically speaking, while a 50/50 split of assets is common, the law is clear that an “equitable” division of the parties’ assets does not require a 50/50 division in all cases. Further, even with a 50/50 split, the exact method of accomplishing the division of an asset, especially a future interest, can vary.
Typically, an individual who owns a pension is loath to part ways with same during a divorce, as the pension is seen as a more desirable form of retirement benefit than a standard 401(k) or IRA and is seen as income above any social security payments that will be received. Regardless, whether an individual is fully vested in a pension or not, the benefit that has been accrued during the course of the marriage is subject to equitable distribution. This results from the theory that a pension is a form of deferred compensation for services rendered during the period of employment, with the focus being on when and how the pension was earned or acquired such that pension benefits provided to one party during the marriage are considered to be derived from the joint efforts of the parties and are subject to equitable distribution.
In dividing a pension, the pension benefit can be paid via a direct offset at the time of the divorce or can be divided via a deferred-distribution, with payment being made when the pension goes into pay status. When a pension interest is directly offset, the pension benefit is valued as of the date of retirement then discounted to present value, with that value either being paid directly in cash or being offset with other marital assets. Using the deferred-distribution method provides the non-employee spouse with a percentage of the benefits earned during the marriage, calculated pursuant to a formula, the amount of which cannot be computed until the employee-spouse retires. This formula, which involves the use of a coverture fraction, involves dividing the total years of the marriage during which the participant was enrolled in the pension by the total number of years the participant is enrolled in the pension multiplied by the applicable percentage interest of the non-participant spouse in the plan (50% in a 50/50 asset division scheme). For example, if the parties were married 15 years, all of which the participant was enrolled in the pension, and at the time of retirement the participant worked 25 years, then with a 50/50 split the spouse would be entitled to 30% of the monthly pension payments (15/25 * 50%), paid directly to him or her via a Qualified Domestic Relations Order.
In addition to the issue of how to divide a pension, the issue of survivor benefits must be considered. An individual can protect themselves both prior to retirement and subsequent to retirement by obtaining a survivor annuity in the pension. Specifically, a Qualified Pre-Retirement Survivor Annuity would entitle the non-participant to an annuity for their life upon the death of the participant prior to the pension going into pay status. Similarly, after the pension goes into pay status, a survivor annuity can be established to furnish payments beyond the life of the participant; however, this would result in a reduced payment during the participant’s life based upon actuarial calculations. Although a spouse is not entitled to a survivor annuity, the Courts have permitted a survivor annuity to be set aside when appropriate upon a review of the following factors: (1) the length of the marriage; (2) the length of anticipated years of service in the pension plan; (3) the age and health of the parties; (4) the pension options available to the party participating in the pension plan; (5) the financial impact of alternate pension options on both parties; (6) the availability of a survival benefit and its impact on the benefit received; (7) the cash value of the pension should the spouse participating in the pension plan die prior to retirement; (8) the availability of other assets to fund retirement; (9) the financial circumstances of both parties; (10) the availability of life insurance to protect the contingent benefit; and (11) any other factors which may be relevant in the case.
Clearly, it is important for individuals in a divorce to seriously consider the options available, and their respective rights to them, in the division of a pension upon divorce, as there is significant room for negotiation to provide both parties with a fair share of a pension benefit.