Rightfully Yours. Gary A. Shulman
in 1984, a new federal pension law was enacted that made it much easier for former spouses to receive a portion of the pension benefits earned by their ex-husbands. These were referred to as the QDRO laws. Today, it’s well-settled law that the pension benefits earned by your spouse during the marriage are considered marital property subject to equitable distribution on divorce. In essence, most domestic relations courts consider the nonparticipant spouse to be a co-owner of the pension benefits earned during the marriage by the husband. Beginning in 1984, former spouses of plan participants became eligible to receive their rightful share of the pension benefits directly from the plan administrator each month without having to rely on payments from ex-husbands. Imagine that. Upon the ex-husband’s retirement, a former spouse could receive a pension check for life mailed directly to her home each month, just as if she were the plan participant. These new QDRO laws became part of the major federal pension law known as the Employee Retirement Income Security Act of 1974 (ERISA).
2. It’s Your Property Right
If your divorce occurred after 1984, and your ex-husband was an active participant under a company pension plan or 401(k) plan, your attorney should have addressed this issue in your separation agreement or judgment entry of divorce. You should have been awarded a portion of your ex-husband’s pension benefits that were earned (or accrued) during the marriage. Let me say this again. If your ex-husband was actively employed and covered under a company pension or 401(k) plan at any time during your marriage, you should be entitled, in your own right, to a portion of his eventual pension or savings plan benefits.
As a former spouse of a plan participant, you are considered to be a co-owner of the pension benefits earned during the marriage and do not merely stand in the shoes of a creditor. You should have been awarded a property interest in his pension benefits. The pension benefits earned during the marriage are just another asset to be “put on the table” when divvying up the marital assets, just like the toaster oven and the microwave. As one Ohio court said, “A pension plan is an investment made by both spouses during the marriage to provide for their later years. It’s only equitable that each party enjoys their rightful share to half of the marital portion of the pension that accrued during the marriage.”
Don’t let your attorney forget about this very important pension asset. Many attorneys are very intimidated by QDROs and the federal pension laws and do not like dealing with pension issues during a divorce. But because more and more employees are covered by pension plans today, it should be of central concern to the attorney and the nonparticipant spouse.
It’s also important to understand that your receipt of a portion of your ex-husband’s pension payment is not automatic. Even if your divorce decree states that you are entitled to a portion of your ex-husband’s pension benefits, you will never see any of these benefits unless a separate legal document called a QDRO was prepared by your attorney and submitted to the pension plan administrator for review and approval.
3. It’s Not Alimony
Don’t confuse your property rights with alimony or spousal support. When a domestic relations court grants you a portion of your ex-husband’s pension benefits at divorce, it is merely assigning to you a piece of property that you already own. In the court’s eyes, half of the pension benefits earned during the marriage are already yours. It just takes a QDRO to secure your property right. Your property interest in your ex-husband’s pension is not considered alimony or spousal support. It belongs to you just as your ex-husband’s share of the pension belongs to him. However, it is critical that your divorce decree include language that awards you a portion of your ex-husband’s pension benefits. Even though the court considers you to be a co-owner of the pension, your share is not automatic by any means. If your attorney has not already done so, he or she should negotiate the division of your ex-husband’s pension benefits during the divorce proceeding. Then your divorce decree or separation agreement should include language that expressly awards you a portion of his pension benefits. And finally, your attorney should prepare a QDRO for submission to your ex-husband’s employer. This is necessary to secure your property interest in the pension benefits.
Any alimony or support payments (child support or spousal support) that may be granted to you at divorce are separate and distinct from the property rights granted to you at divorce. Unlike alimony or spousal support, which provides you with immediate and perhaps only temporary support after the divorce, you will generally not be eligible to receive your share of the pension benefits until your ex-husband is eligible to retire. But in many cases, depending on the type of pension plan involved, you can start receiving your share of the pension either immediately or before he actually retires. And your share of any defined contribution plan benefits (such as a 401(k) plan) can generally be paid to you immediately once the QDRO has been approved by the plan administrator.
4. How Much Is the Retirement Benefit Worth?
Before getting into a discussion of how much your spouse’s retirement is worth, it is important to understand the distinction between the two basic types of retirement plans offered by companies today: defined contribution plans and defined benefit pension plans.
4.1 Defined contribution plans
The first type of retirement plan, and the simpler of the two, is called a defined contribution plan. Defined contribution plans come in many flavors. Some are referred to as 401(k) plans. Others are called profit-sharing plans, savings plans, or thrift plans. They all have one thing in common: a “pot” of money that is maintained for each plan participant and that grows each year with contributions and interest. By a pot of money, I mean that the company maintains an individual account for each employee. It’s very similar to the individual retirement account (IRA) that one may open at a bank.
4.1.a Calculating the value of a plan
You can always calculate the value of a defined contribution plan by simply looking at the total account balance line on a plan statement. Typically, employees receive annual statements that show the current year’s contributions and investment earnings and the end-of-year total account balance. The contributions to an employee’s account under a defined contribution plan generally come from one of two sources. The first source is generally from the employee’s own paycheck. In other words, your ex-husband may have elected to contribute a portion of his weekly paycheck to the plan. Usually, this is done on a pre-tax basis, which means that his contributions (the portion taken out of his paycheck) were distributed directly into his retirement plan account before being taxed by Uncle Sam. The second source of contributions to a defined contribution plan comes from the employer itself. Your ex-husband’s employer may make matching or voluntary contributions over and above those contributed by your ex-husband. The contributions in the retirement plan are then generally invested in one or more available mutual fund alternatives (or in company stock, if applicable). Typically, employees can spread their contributions in any way they choose from among several investment alternatives, ranging from low-risk money market accounts to high-risk and more volatile types of funds.
At any time, the value of your ex-husband’s defined contribution plan is merely reflected by the total account balance as of that date. For example, if you divorced on July 1, 1999, you should be entitled to half of the total account balance under your ex-husband’s defined contribution plan that accumulated during the marriage until July 1, 1999. You, or your attorney, could obtain a financial statement from the plan administrator that shows the total account balance on that date. Assuming that your ex-husband did not participate in the plan before your marriage, you would simply be entitled to one-half of the total account balance on July 1, 1999. This “what you see is what you get” type of plan is fairly easy to incorporate into the marital estate during a divorce or dissolution proceeding. A professional pension evaluator is not needed for these types of plans. Again, a participant’s benefits under a defined contribution plan are based solely on the amounts contributed to his accounts, plus any income, expenses, gains, and losses that may be allocated to his accounts. When participants