Considerations for Defined Benefit Plans in Divorce
Dividing defined benefit retirement accounts, often called pension plans, during a divorce requires a unique approach compared to defined contribution accounts. Here’s what you need to know to navigate this complex process and ensure a fair division.
1. Identify the Type of Defined Benefit Plan
Start by identifying whether the defined benefit plan is a traditional pension or another type. Each type may have its own rules, benefits, and restrictions. Understanding these distinctions can impact how the benefits are valued and divided.
2. Understand How Benefits Are Calculated
Pension benefits are typically calculated based on factors like salary, years of service, and age at retirement. Review any specific plan provisions, such as options for early retirement, survivor benefits, or unique rules that might affect division.
3. Check for Plan-Imposed Restrictions
Be aware of any restrictions that might limit how benefits are divided or when they can be accessed. Some pension plans have rules about the timing and method of payout that could influence your options during division.
4. Determine the Present Value of the Pension
Calculating the current worth of future pension payments is often complex and may require a professional valuation. If the employee spouse is not close to retirement age, there are additional risks, such as the potential loss of benefits if the employee leaves the job before being fully vested or passes away before retirement. Typically, you’ll focus on the “marital portion” — the benefits earned during the marriage — to determine the portion of the pension subject to division.
5. Set Up a QDRO to Divide Benefits
After determining the marital share, you’ll likely need a Qualified Domestic Relations Order (QDRO) or a similar court order to formalize the division. A QDRO specifies how the pension will be split and ensures the non-employee spouse receives their portion directly from the employer, not from the ex-spouse. The QDRO should outline whether the non-employee spouse will receive a lump sum or a share of monthly annuity payments, depending on the pension plan rules and both parties’ preferences.
6. Consider Tax Implications
Pension benefits are generally taxed when received, so it’s essential to consider how this will affect both parties’ finances. Assess how the division will influence long-term retirement plans and financial security for each spouse.
7. Balance with Other Marital Assets
To offset the value of the pension, adjustments to other marital assets may be necessary. If the pension division risks affecting one party more than the other, consider these adjustments to maintain financial fairness.
8. Ensure Proper Preparation of the QDRO
A QDRO must meet legal and plan-specific requirements to divide benefits correctly. Seek help from a professional experienced in preparing QDROs, and have it approved by both the court and the pension plan administrator. After approval, the plan administrator will update the records to reflect the agreed division.
9. Seek Professional Guidance
Consulting legal and financial professionals is crucial to ensure interests are protected. A lawyer with experience in pension division can clarify legal requirements, while a financial professional knowledgeable in divorce planning can help evaluate the long-term financial impact.
10. Follow Up Regularly
Once the QDRO is approved, follow up with the plan administrator to confirm that the division is being implemented correctly. If the pension is not yet in payment status, periodically review the status to ensure the division will be executed as planned once payments begin.
Dividing a defined benefit retirement account during a divorce can be complex, but understanding these considerations and consulting qualified professionals will help both parties navigate the process fairly and secure their financial future.