Be Careful When Dividing Pensions in a Divorce

One asset that has tended to become overlooked in many dissolution matters are defined benefit pension plans. Defined benefit plans are plans in which the employee holds in a pool of money which is contributed by current employees, perhaps the employer, and then invested by the fund which maintains the monies. This pool of money is then used to fund continuing income streams for the retirees. With defined contribution plans (401K, deferred compensation plans, etc). The employee funds their own personal account, which the employee can withdraw from after retirement. The defined contribution plan is limited to the amount the employee (and/or employer) has invested in the account. With the defined benefit plan, the monies last the balance of the retiree's lifetimes, in theory. That last fact, in this age of increasing life expectancy, has created incentives to go away from defined benefit plans, particularly as the number of younger employees paying into these plans has dwindled.

When dividing defined benefit plans, the trial court has discretion to divide these plans in the most equitable fashion. The trick is understanding in most cases there is no current funds in which to draw cash if the employee is below retirement age, and still actively employed when the marriage comes to an end. Hence, the Court must take into account the number of years the parties were married, the number of years the employee spouse was employed and a member of the fund, and the income they will be at or or near retirement age.

In some cases, the parties lawyers' will employ actuaries to estimate the present community interest value in the pension. While these estimates maybe accurate, there are two problems which occur with these estimates. First, they assume that the employee spouse will live for up to 20 years after retirement, which may not be the case. Second, the estimates will sometimes be large enough to force the employee spouse to give up other assets to keep their pensions intact.

The more common way is for the parties to request that the Court order the pension to be divided when the employee spouse retires. Once this is done, the Court can order a separate order (A DRO or Domestic Relations Order). The most common method to determine and divide the community interest in a pension is to use the "time rule". The "time rule" is a fraction used to determine the number of service credits included in the years that the spouse was employed during the marriage. While the most common, the method may not be the best. As a recent case In re Marriage of Gray [(2007) 2007 DJDAR 1482] pointed out, the parties and attorneys need to obtain an accurate understanding about how the pension benefits are determined before selecting the method to apportion separate property and community property benefits.

Article Submitted By: Attorney Daniel Gold