“What Are The Options For Dividing Pensions In Divorce?”

In California, there are two main ways to divide pensions: the Time Rule, or a buyout. Pensions are retirement plans with a monthly payment at retirement age—they are often called retirement plans, and they differ from 401K or IRA accounts as they do not fluctuate in value and have a fixed payout based on the factors in place at the date of retirement. The terms will be used interchangeably in this article.

The Time Rule is a standard way of dividing a pension that involves a fairly simple formula: you take the number of years that the parties were married while the party holding the retirement put in service years on the retirement plan (that party is called the plan holder or plan participant), divide that by the total number of years put into the plan, and then divide in half. So, for instance, if a plan participant put into a plan for 20 years, was married for 10 of those years, the ex-spouse would be entitled to a 25% payment from the pension when payments begin.
One of the disadvantages of the time rule, however, is that you do not get your money immediately: payouts begin when the plan holder retires. The disadvantage for the plan holder is that he or she will never receive a full retirement benefit since the other party will be getting a percentage.
Some people opt to do a cash buy out. In order to do this, the plan must be valued in present day dollars. A forensic accountant can take the plan details, the ages of the parties, the years of marriage, and anticipated date of retirement, and calculate a present-day value, or “buy-out” amount. This is often advantageous for the parties as one party may need the money to make a major purchase, such as a house, and the other party may wish to pay now to ensure a full retirement payment at the time of retirement. This may not be possible with large retirements, however, as the buyout amount may be very significant.

A valuation of the retirement may also be useful in cases where both parties have a retirement. In those cases, oftentimes one party will have a larger retirement than the other, but the parties will wish to each keep their own retirement and have an off-setting payment of other property made to the party with the smaller retirement to balance out the property division. This can only be done if the present day values are known.
In any division of a retirement plan involving the Time Rule and a split of accounts, the parties should immediately prepare a Qualified Domestic Relations Order (sometimes called a QDRO or a DRO) and have the court endorse it so that when retirement comes the orders have already been served on the retirement plan. Waiting to do so can cause serious problems, such as when one party retires but does not inform the other, or one parties dies before the QDRO is entered.

This should also be done as early as possible (I recommended doing it DURING the dissolution and having the QDRO ready at the time of entry of judgment) because of issues that can later become problems, such as whether or not survivor’s rights will be preserved, whether or not the plan holder can add a new beneficiary in the future of he or she remarries. These issues can lead to disagreements and litigation later on if they are not negotiated as part of the settlement.

It should be noted that different considerations apply with 401K and IRA retirement plans. There are tax consequences that may significantly affect the values of those accounts and there can be a multitude of valuation issues.
With ALL retirement issues, you should be aware that this is a complex area of law involving tax consequences, complicated orders that must be approved by what are usually large companies with their own layers of red tape. This is one of the most important areas in a divorce to get both legal advice and tax advice so that you are making educated decisions.

DISCLAIMER: All legal principles quoted are valid as of the date of writing in the State of California. However, you should NEVER base your actions on a legal article, blog, or internet story, as facts in real life are complicated. You should have your case evaluated by an attorney experienced in the area of law needed for your case. In addition, there are often exceptions and potential changes to results that occur due to facts that you may think are trivial or unimportant. This article should not be taken in any way as legal advice on your specific legal matter.