Pensions & Divorce

Sep 13, 2023 | Written by: Diana N. Fredericks, Esq. | Share

Pursuant to a divorce, and as part of equitable distribution in New Jersey, retirement accounts, including pensions, are divisible.  

There is a unique mechanism called a Qualified Domestic Relations Order (QDRO) that permits a pension plan to be divided.  A QDRO is also used for 401(k) division.  A QDRO is a court order that is typically sent to the participant’s plan for preapproval and then the court signs off on same.  Once finalized, the Plan Administrator for the pension processes the QDRO, which means that the portion of the pension payable to the alternative payee (non-employed spouse) is segregated from the participant’s portion (employee).  The pension is not typically paid out until the employed spouse retires; however, some plans (few) allow for a lump-sum buyout. The important takeaway is that, while the process is typically similar for most retirement plans, the plans themselves are often very particular and specific.

When negotiating your divorce settlement, or at trial, it is very important to address the nuanced questions that must be answered when asking an actuary to prepare a draft QDRO.  Is the alternate payee entitled to cost-of-living adjustments (COLA)?  Is the alternate payee to be considered a survivor or receive those benefits?  These options do not exist in every plan, but understanding your plan and options before the divorce agreement is signed is important, so that you are not left without a clear plan to finalize this process.  Moreover, some of these options may modify the amount the pension pays out (reduce the benefit), so it is important to appreciate the options and any consequences.  

Although most QDROs are not typically finalized until after the divorce (many plans require a final judgment of divorce to process the Order), they are integrally important in the negotiations of your settlement and to ensure you understand the nuances involved with retirement accounts and equitable distribution.  

How is the amount of the pension determined?  Typically, in a divorce proceeding, we must ascertain what portion of the pension is marital, as that is the amount subject to equitable distribution.  For example, if the entire pension was earned during the marriage and the employee spouse has already retired, then it is likely that 100% of the pension is marital.  

However, if the employee has worked longer than marriage or stated otherwise as a premarital component to the pension, then that changes the calculation.  Typically, the non-employed spouse (alternate participant) is entitled to 50% of the marital portion of the pension defined as the date of the marriage to the date of complaint (or cutoff date, if otherwise agreed to).

The valuation of a pension is typically done by a formula, which is somewhat complicated, so it is important to ensure your attorneys understand and are familiar with same.   The coverture fraction is a fraction in which the numerator is the number of years of employment that took place during the marriage, while the denominator is the total number of years of employment that it took to earn the pension.

Often during a divorce, one party will elect to have the marital portion of the pension(s) valued.  The expense is typically minimal compared to the overall costs, and it is important to appreciate the amount of the asset that may actually be in dispute.  Moreover, one party may want to waive his/her half of a pension or other retirement asset in exchange for something else, like equity in a home or a 401(k).  When cases are resolved privately via a settlement agreement, the parties are able to be creative in their approach and trade assets (of course, taking into account those assets that are pre- and post-tax dollars to ensure a fair comparison).  

It is also very important to know that this same process typically applies to New Jersey State Employees who participate in PERS – Public Employee Retirement System. 

However, this process is NOT the same for PFRS – Police and Firemen’s Retirement System.   If you are a retiree of the PFRS or the State Police Retirement System (SPRS), a divorce/dissolution automatically precludes your former spouse/partner from ever receiving a survivor’s benefit.  Upon your death or the death of your former spouse/partner, all withholdings mandated under a matrimonial/civil union dissolution order will cease.  In these cases, there may be alternatives for the alternate payee; that is something to understand, appreciate and discuss with your divorce attorney.  Moreover, if you are a participant in PFRS and have already retired and already named your beneficiary, that may NOT be modifiable, even in divorce.

Understanding, valuing and equitably distributing pensions (and retirement assets) pursuant to a divorce can be complex.  It is important to ensure your divorce attorney is familiar with these concepts and that you engage the appropriate actuary and other experts to assist in the finalization of this process to ensure fairness and equity.

Below are some resources and additional information on retirement accounts and divorce:

1. Non-Traditional Benefits that Must be Considered in a Divorce (2018)
2. Military Pensions: How the “Frozen Benefit Rule” Applies in Divorce Cases (2017)  
3. Dividing Retirement Accounts After a Divorce (2016)  
4. A defined benefit plan (DBP) promises to pay a monthly benefit to the participant at retirement for the duration of the member’s lifetime. The payment is based on a specific formula described in the plan summary, and it usually incorporates years of service with the company and salary at the time of retirement. The old-fashioned company pension given for years of faithful service is a defined benefit pension. A defined contribution plan (DCP) is one in which the member makes voluntary contributions to an account in his or her name. The employer may or may not make matching contributions. The amount accumulated includes all the contributions as well as any gains or losses. The popular 401(k) is a defined contribution pension.

 

Diana N. Fredericks, Esq., devotes her practice solely to family law matters.  She is a Certified Matrimonial Law Attorney and was named to the NJ Super Lawyers Rising Stars list in the practice of family law by Thomson Reuters from 2015 through 2022, to the NJ Super Lawyers list in 2023, and to the New Leaders of the Bar list by the New Jersey Law Journal in 2015.  Contact Ms. Fredericks for a consultation at 908-735-5161 or via email.

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Any statements made herein are solely for informational purposes only and should not be relied upon or construed as legal advice.