Working With Offsetting Retirement Benefits

Most marriages today have both partners employed. In the usual situation the husband has the job with better benefits but that, of course, is not always the case. We often see the husband in a job with better pay but lesser retirement benefits (many unions, or executive positions with smaller private sector companies, do not have particularly good retirement benefits) while the wife might be a teacher or employed in another public service job. In a case like that, it usually will be the wife who has the better retirement benefits. In any event you will be dealing with offsetting retirement benefits.

Over the past 20 years many private companies have abandoned traditional pensions in favor of 401(k) plans or other retirement savings schemes. If both the husband and the wife work in the private sector, and have a form of retirement savings benefits, dealing with two defined contribution plans is relatively easy. Whomever has the larger account balance owes 50% of the difference (assuming it is all marital) to the other partner. Distribution can be handled by offset against another marital asset or by use of a Qualified Domestic Relations Order to either transfer the difference to the other partner’s retirement account or distribute the funds immediately.

The difficulty arises when you have one partner with a defined benefit plan and the other with a defined contribution plan. You have some choices in these situations. You can do two Qualified Domestic Relations Orders dividing the marital share of each plan equally or do a present value of the pension plan and the participant with the higher value benefit compensates the other partner with 50% of the difference in the value by immediate offset against another marital asset. If you want to use a Qualified Domestic Relations Order and the defined contribution plan has the higher value, it is relatively easy to determine the amount to be distributed. Using the same methodology as in the previous example, 50% of the difference is awarded to the party with the pension..

It becomes a little more difficult if the pension plan is more valuable than the defined contribution plan and the parties elect to do a Qualified Domestic Relations Order, possibly to insure that the non-participant in the pension retains their interest in the survivor benefits. In this case you must place a present value on the pension benefit and subtract the value of the defined contribution account from that value. Once you have that figure you can determine the percentage of the pension that is left to be distributed by dividing the adjusted value of the pension into the value of the defined contribution plan. The results of that calculation will identify the portion of the pension that is marital after you subtract the defined contribution plan. Now when preparing your Qualified Domestic Relations Order instead of “50% of a fraction as determined by dividing the number of months married while employed by the total months of employment” you would replace 50% with 50% of the figure determined by the calculation that adjusted the % value of the pension after subtracting the value of the defined contribution plan as shown in the beginning of this paragraph.

Your new Qualified Domestic Relations Order distribution might read “28.3% of a fraction as determined by dividing the number of months married while employed by the total months of employment”. If you have the order prepared by a pension consultant he or she will make these calculations for you and give you a sheet explaining how the numbers used were calculated.

If both parties have defined benefit plans the procedure would be the same only you would have to have two pension appraisals prepared. The difference between the higher value pension and the lower value pension would be subtracted from the higher value pension and the same methodology for preparing the Qualified Domestic Relations Order language used as in the previous paragraphs.

Working with offsetting retirement benefits in divorce cases will only become more common as our society has now moved to the two working partner marriage construct. Your job is to recognize that different benefits are handled different ways and to insure that the proper adjustments are made. If you are uncomfortable working with numbers, get outside help. It is too easy to make a very costly mistake if you inadvertently divide the wrong number into the wrong number, which we have seen more often than you would think. If you lack confidence in your math skills it is wise to use an expert to avoid what could be a very costly error.

RETIREMENT ASSET RELEASE FORM

I, ________________________________________, do hereby instruct a representative of
(Plan Participant - printed)

____________________________________________________________________________
(Name – address – phone # of benefits provider)
_____________________________________________________________________________

to cooperate fully with ___________________________________________________________
(Name of attorney - address - phone #)

_________________________________________________ or his/her designee and answer any and all questions relating to my pension plan or any other retirement or deferred income plans in which I participate. I also request that you furnish this individual a current plan booklet and a current accrued benefits statement, and a statement as of ___________________________,
(Marital Property Cut-off Date)

of all of my accrued retirement benefits including any defined contribution, defined benefit or deferred compensation plans in which I am a participant. The defined benefit plan statements should detail the accrued vested benefit payable to me on my normal retirement date along with a statement of projected pension benefits, including supplemental benefits, if any, payable to me on the earliest date that I may receive them on an actuarially unreduced basis (based on my current income) assuming continued employment to that date. If my benefit is contingent upon my classification or job level or contribution level please so state and advise what that may be. Also, please provide a statement showing my service computation date (first day of employment), dates of all breaks in service (if any), my current salary and my annual salary for the past five years, the legal names of the plans in which I participate and their addresses and the name, address and telephone number of the person to be contacted if additional information is needed. I authorize that person to answer all questions incident to this request. The defined contribution plan statements should show my current plan balances as well as my account balances on

____________________________ and on ____________________________.
(Marital Property Cut-off Date)                              (Date of Marriage)

_________________________________________ ______________________________
Signature of Plan Participant                                                Today’s Date

_____________________________________ __________________________
Date of Birth                                                                   Social Security #

______________________________                       ___________________________
Witness # 1 - Signature                                                  Witness # 2 - Signature

______________________________                        ___________________________
Witness # 1 - printed                                                       Witness # 2 – printed