In order to fairly divide retirement plan assets/accounts that have been accumulated during a marriage, a divorcing couple and their advisors must learn the two different varieties of retirement plans:
1. Defined contribution plans create individual accounts for the participants, or...
2. Defined benefit plans create retirement benefits for the participants (sometimes shown as individual accounts in defined benefit plans, also known as cash balance plans).
In this essay, I'll focus on the top issue which faces a fair division of retirement benefits accrued in a non-cash balance defined benefit plan. Assets payable from a defined benefit plan are calculated via a specific formula. That specific formula, typically, will merge the participant's income, the participant's plan service credits, a rate of benefit credit per each year of service credit, and the age at which the benefit is expected to commence.
For example, the plan formula for benefit calculation might be 1.5% of final average pay (the average of the highest 5 years in the last 10 years of service) times the number of years of service credits, payable monthly from age 65. So, a participant with 20 years of service at 65 will have earned a monthly retirement benefit equal to 30% of final average annual pay divided by twelve.
Therefore, the issue to be deliberated is:
Do we apportion the retirement benefit earned as of the date of the complaint, or do we apportion the retirement benefit earned (or projected to be earned) at 65, prorated for the relationship between the years of service credits during the marriage and the years of service credits earned (or projected to be earned) at 65?
It's not unusual to find that benefit projections properly prorated will result in a larger share for the non-participant spouse.
For example,
- Retirement Benefit earned at date of complaint = $1,000 per month
- Retirement Benefit projected at 65 = $3,000 per month
- Years of service credits earned during the marriage = 10
- Years of service credits projected at 65 = 20
- Retirement benefit to be divided (non-projected) = $1,000 per month
- Retirement Benefit to be divided (projected) = $1,500 per month
($3,000 times 10/20)
When a marital estate is involving 1 or more retirement plans, the issues that require consideration are numerous. With proper guidance, each deliberation will result in a proper division of retirement plan assets.
1. Defined contribution plans create individual accounts for the participants, or...
2. Defined benefit plans create retirement benefits for the participants (sometimes shown as individual accounts in defined benefit plans, also known as cash balance plans).
In this essay, I'll focus on the top issue which faces a fair division of retirement benefits accrued in a non-cash balance defined benefit plan. Assets payable from a defined benefit plan are calculated via a specific formula. That specific formula, typically, will merge the participant's income, the participant's plan service credits, a rate of benefit credit per each year of service credit, and the age at which the benefit is expected to commence.
For example, the plan formula for benefit calculation might be 1.5% of final average pay (the average of the highest 5 years in the last 10 years of service) times the number of years of service credits, payable monthly from age 65. So, a participant with 20 years of service at 65 will have earned a monthly retirement benefit equal to 30% of final average annual pay divided by twelve.
Therefore, the issue to be deliberated is:
Do we apportion the retirement benefit earned as of the date of the complaint, or do we apportion the retirement benefit earned (or projected to be earned) at 65, prorated for the relationship between the years of service credits during the marriage and the years of service credits earned (or projected to be earned) at 65?
It's not unusual to find that benefit projections properly prorated will result in a larger share for the non-participant spouse.
For example,
- Retirement Benefit earned at date of complaint = $1,000 per month
- Retirement Benefit projected at 65 = $3,000 per month
- Years of service credits earned during the marriage = 10
- Years of service credits projected at 65 = 20
- Retirement benefit to be divided (non-projected) = $1,000 per month
- Retirement Benefit to be divided (projected) = $1,500 per month
($3,000 times 10/20)
When a marital estate is involving 1 or more retirement plans, the issues that require consideration are numerous. With proper guidance, each deliberation will result in a proper division of retirement plan assets.
About the Author:
Howard
Phillips is a pension actuary, and has helped companies and their employees
with the design, installation and administration of their tax-qualified
retirement plans.Over his 40 year career, Mr.
Phillips was President of Consulting Actuaries Incorporated and President and
Director of The American Society of Pension Professionals and Actuaries.DIVIDING RETIREMENT PLAN ASSETS IN A DIVORCE is his
first book.
Phillips is a pension actuary, and has helped companies and their employees
with the design, installation and administration of their tax-qualified
retirement plans.Over his 40 year career, Mr.
Phillips was President of Consulting Actuaries Incorporated and President and
Director of The American Society of Pension Professionals and Actuaries.DIVIDING RETIREMENT PLAN ASSETS IN A DIVORCE is his
first book.