Retirement Accounts and Plans are VITAL Considerations When You Separate From Your Spouse (part 2)
In separation and divorce, division of retirement accounts may seem daunting; there are two varieties that we, as divorce attorneys, encounter regularly: defined contribution plans and defined benefit plans.We covered Defined Contribution Plans in a previous blog, and today we’ll be covering Defined Benefit Plans.
Defined benefit plans differ from defined contribution plans in that benefits are typically based on a number of factors including, but not limited to, the following: your age, your years/hours/points of service, and/or your final or highest average compensation. Every plan has a different formula and required numbers of years of service (or points, if you are in the military).
You might be tempted to look at your or your spouse’s most recent statement for a defined benefit plan and conclude that the balance shown on the statement is what the asset is worth. If the statement does not show a “lump sum” amount for the benefit then you would be mistaken. The balance on the statement is typically not the actual present value of the asset, but rather the amount the participant has contributed during their employment/service plus some interest. It does not typically reflect the employer contribution.
If you want to find out what a pension is worth, you will need an actuary do an analysis based upon life expectancy and present-day discounting (especially if you want to attempt to cash out your share of your spouse’s benefit). Actuaries calculate the lump sum values of streams of payment, which is what a pension benefit really is.
If you are not considering cashing out, or if that option is not available, there are TWO types of interest you can receive from your spouse’s defined benefit plan and both will require a Domestic Relations Order (DRO).
With a separate interest DRO, the non-participant spouse’s interest is segregated into its own pension and it is adjusted to their own life expectancy. They are then eligible to be paid for their life (although depending on their actual age, the alternate payee spouse may receive less each month than the participant). Your payout is determined by your life expectancy. If the alternate payee spouse dies before the participant spouse, the benefit will not “spring back” to the participant spouse.
With a shared interest DRO, the alternate payee spouse’s benefit is tied to the participant spouse’s benefit. Thus, you will not begin receiving a benefit until the participant spouse retires, and payments will end when the participant spouse dies (unless a joint-survivor annuity is elected). If the alternate payee spouse dies, the benefit may “spring back” to the participant spouse. If the participant spouse has already begun receiving their pension benefit prior to separation/divorce, then the shared interest approach is most likely the only available option.
It is very common for the defined benefit and defined contribution plans accumulated during the marriage to be the marriage’s most valuable assets, and a great deal of care needs to be taken when considering them as part of your marital estate.
The attorneys at Tom Bush Law Group will guide you through the intricacies and options related to defined benefit and defined contribution plans and work hand-in-hand with some of the most skilled actuaries in North Carolina.
By: Brandon McCarthy, Esquire. To schedule a call with Brandon or another of our family law attorneys, please call us at (704) 347-0110.