What You Must Consider in Splitting Pensions in Divorce – Part 1

What You Must Consider in Splitting Pensions in Divorce – Part 1

When splitting a retirement pension in divorce, most times, not necessary to determine the present day value of the pension. In my experience, I have seen spouses and divorce professionals spend unnecessary time, money, and energy in this process when it is a far-gone conclusion that the pension can only be divided by sharing the benefits.

Financial Planning Divorce Annapolis MDPensions are Marital Property and therefore subject to division in divorce cases. There are two methods used to divide the plan(s), the “If, as, and when” method and the Offset method. If the spouses have decided or can only share the benefits if, as, and when they are paid out, there is no reason for the pension(s) to be formally valued. At a cost of $500 for a full report, this unnecessary step should be avoided.

With either method, you will need the following information:

  • Date of marriage
  • Date employee-spouse started in plan
  • Cut-off date (date no longer marital property and benefit calculated)
  • Projected monthly benefit at early and full retirement
  • Cost of Living (COLA) provisions and history
  • Plan Documents and/or a QDRO Kit from the employer’s Plan Administrator

Once the projected monthly benefit has been determined, you must calculate how much of the benefit is Marital Property. This is done by way of the Coverture Fraction as follows:

Time* married (nominator)/Time in Plan (denominator) X .50 X monthly benefit

I have found that placing the dates on a timeline is most helpful in illustrating the calculation.

property division divorce

The present values in this chart should be ignored. They will be used in part II of this blog for a discussion of the offset method.

 Time can be in days or months

The Coveture Fraction in this illustration would be months married to cut-off (6/1996 to 6/2013 = 207) over total months in Plan (9/1994 to 2/2024 = 358); 57.8% then of the pension would Marital Property. If the projected benefits at age 55 were $4,000, the marital portion would be $2,312, with 50% of this going to each spouse. The employee-spouse would receive this 50% ($1,156) plus the separate share of the pension or $1,688. In summary, the non-employee spouse would be entitled to 28.9% ($1,156/$4,000) of the pension paid at the employee-spouse’s retirement.

I use this tye of illustration to explain how a pension is divided in a 50/50 split.The QDRO will include language that directs the Plan Administrator to use the formula to determine the actual percentage of benefits to be paid to each ex-spouse. Of course there are alternatives to a 50/50 split, and COLA and Survivor Benefits also need to be addressed.

John Faggio is a CPA, CFP, and a Certified Divorce Financial Analyst™. We provide comprehensive divorce financial analysis and planning services, including pension valuation estimates . Call John today at 410-988-7333 for an initial, flat-fee consultation or a quote to provide the services that you need.

By | 2017-08-04T09:08:03+00:00 September 4th, 2013|Pensions|0 Comments

About the Author:

John Faggio is the managing director of Faggio Financial, LLC (www.divorce-finances.com), Maryland’s only exclusive matrimonial finance practice. John is a CPA, a Certified Financial Planner® Professional, and a Certified Divorce Financial Analyst (CDFA®).

Leave A Comment