Division of Retirement Benefits

Retirement Benefits can be divided into two main categories: Defined Benefit Plans and Defined Contribution Plans.

A Defined Benefit Plan specifies the amount of the benefit the employee will receive upon retirement.  The benefit is defined within the plan and is determined by years of service and the compensation the employee earned during employment.  With some exceptions, the employee does not have the ability to receive a lump sum distribution from the plan but rather will receive a monthly benefit upon entering pay status.  Each plan has a Summary Plan Description that explains how to obtain the benefit and how the benefit is calculated.  Examples of Defined Benefit Plans include the State Employees' Retirement System (SERS), the Public School Employees' Retirement System (PSERS) and several Federal pension plans (CSRS, FERS).

Under a Defined Contribution Plan, the employer and employee specify the amount that is being contributed to the plan.  The present value of the plan is easily discernable from paper statements provided to the employee or from on-line account inquiries.  Types of Defined Contribution Plans include ESOPs, SEPs, Profit Sharing Plans and 401(k)s.

An issue for the parties is to determine if the retirement benefits are capable of division via "immediate offset" or if a "deferred distribution" is required.  An immediate offset allows one party to retain the retirement benefit in exchange for another asset in the marital estate.  Deferred distribution occurs when the benefit is split for distribution when the participant enters pay status.  23 Pa. C.S. §3501(c) provides the method for determining the marital and non-marital portions of retirement plans.  It states:

1) In the case of the marital portion of a Defined Benefit Retirement Plan being distributed by means of a deferred distribution, the Defined Benefit Plan shall be allocated between its marital and non-marital portions solely by use of a coverture fraction.  The denominator of the coverture fraction shall be the number of months the employee spouse worked to earn the total benefit and the numerator shall be the number of such months during which the parties were married and not finally separated.  The benefit to which the coverture fraction is applied shall include all post separation enhancements except for enhancements arising from post separation monetary contributions made by the employee spouse, including the gain or loss on such contributions.

(2) In the case of the marital portion of a Defined Benefit Retirement Plan being distributed by means of an immediate offset, the Defined Benefit Plan shall be allocated between its marital and non-marital portions solely by use of a coverture fraction.  The denominator of the coverture fraction shall be the number of months the employee spouse worked to earn the accrued benefit as of a date as close to the time of trial as reasonably possible and the numerator shall be the number of such months during which the parties were married and not finally separated. The benefit to which the coverture fraction is applied shall include all post separation enhancements except for enhancements arising from post separation monetary contributions made by employee spouse, including the gain or loss on such contributions.

In summary, with respect to deferred distributions of benefits, the benefit is measured at the date of retirement and benefits arising from post-separation monetary contributions of the employee are excluded.  Additionally, the coverture fraction equals the length of service during marriage (before final separation) divided by the total length of service up until benefits are paid. Therefore, it is implied that benefits resulting from promotions, etc., after separation (but before retirement) are INCLUDED in the amounts to which the coverture fraction applies.

With respect to the immediate offset of benefits, the present value of benefits is measured at the date closest to the hearing as possible and the present value of benefits arising from post-separation monetary contributions of the employee is excluded. Furthermore, the coverture fraction equals the length of service during marriage (before final separation) divided by the total length of service up until the date that the value of benefits is measured . The implication of this subsection is that benefits resulting from promotions, etc. after separation (but before valuation date) are INCLUDED in the amounts to which the coverture fraction applies.

Other issues to consider with regard to retirement plans in divorce include vesting (retirement benefits - both vested and non-vested - are marital property subject to equitable distribution) and survivorship benefits (issues regarding the cost of same and responsibility for payment).

If immediate offset is the method of distribution, it will be necessary to obtain a present value calculation to determine the value of the asset which is offset against other marital assets and debts.  If deferred distribution is used, it may or may not be necessary to obtain a present value calculation for the benefit.  Present value calculations can be obtained from a variety of sources including software applications, on-line valuation services and local actuaries. 

If retirement benefits are being transferred to the non-participant spouse (often referred to as the "alternate payee"), a court order directed to the Plan Administrator is typically required to preserve the tax deferred status of the funds being transferred.  This court order (called a Qualified Domestic Relations Order or QDRO for many types of plans) should be processed at the same time as the request for the entry of the divorce decree.  If the QDRO is not entered at the same time as the decree in divorce and the participant spouse dies before the entry of the QDRO, the plan may not honor the right of the alternate payee to receive all or a portion of the benefit.  Many plans offer sample QDROs and will review and approve a draft prior to its entry as a court order. 

            Consider the recent U.S. Supreme Court decision of Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, 555 U.S. _____ (2009) where the participant's failure to change his beneficiary designation on his DuPont Savings and Investment Plan (SIP Plan) resulted in the balance in the plan (approximately $400,000.00) being paid to his ex-wife nearly 7 years after the parties divorced.  Wife's waiver of her interest as part of the divorce decree was ineffective as to the SIP Plan because such a waiver is only effective if executed through the "plan documents."

            Consider Smith v. Smith, 938 A.2d 246, 595 Pa. 80 (2007) where the Court held that the value of the post separation increases in value that occur as the result of legislative action are marital as opposed to post separation increases which occur as the result of post separation monetary contributions made by the employee spouse.