What is a “pre-retirement lump sum” benefit, and can I get one in my divorce?
A pre-retirement lump sum benefit is available from most pension plans. Outside the divorce context, it is paid to a designated beneficiary or current spouse in the event that the pension plan participant dies before they retire and begin to receive benefits from the pension plan. Whether the pre-retirement lump sum benefit (outside the divorce context) can be paid to a designated beneficiary or must be paid to a current spouse is determined by plan rules and federal law. In the divorce context, most plans allow for a Qualified Domestic Relations Order (QDRO) or other, similar order, to supersede the beneficiary designation or plan rules requiring the payment to a current spouse, to allow for a payment to a former spouse.
How is the amount of the pre-retirement lump sum benefit determined?
While the participant is employed, they may be making contributions to the pension plan. In addition, the employer is likely making contributions to the pension plan on the participant’s behalf. These two amounts, as well as interest earned thereon, are usually combined to make up the pre-retirement lump-sum benefit amount.
How is the pre-retirement lump sum benefit treated in a divorce?
Most plans allow for a QDRO to specify whether all or a portion thereof should be paid to the former spouse (alternate payee) in the event that the participant dies prior to beginning their retirement benefit from the plan. Therefore, it is important that during the negotiation of any settlement agreement or argument in court that the former spouse (alternate payee) include a request for the portion of the pre-retirement lump sum benefit they desire.
How much of the pre-retirement lump sum benefit can I receive?
A former spouse (alternate payee) can receive up to 100% of the pre-retirement lump sum benefit. Typically, however, a former spouse (alternate payee) would receive 50% of the amount earned during the marriage. For example, if the participant was participating in this pension plan for half (50%) of the marriage, then the former spouse’s (alternate payee’s) benefit would be 50% of 50% of the benefit, or 25% of the total benefit. However, pension plans will typically accept any percentage or easily followed formula that the parties agree upon (or is awarded by the court).
How much of the pre-retirement lump sum can I preserve for a potential future spouse or other beneficiary?
A former spouse (alternate payee) can receive as little as 0% of the pre-retirement lump sum benefit. As stated above, a typical division would award the former spouse (alternate payee) 50% of the amount earned during the marriage. If this is the case, then any additional amount could be available for a potential future spouse or other beneficiary. Some plans may allow for only one person to receive this benefit, however. So, it is important to research whether this is a plan rule – if that is the case, then if the former spouse (alternate payee) receives any part of the pre-retirement lump sum benefit then the remainder would not be available for a potential future spouse or other beneficiary.
Can a Court award the pre-retirement lump sum benefit?
If the participant’s interest in the pension was earned during the marriage and the regular pension retirement benefit is divisible by the court, then it is likely that the pre-retirement lump-sum benefit is also divisible by the Court. However, it is important to consult with an attorney licensed in your state and experienced in family law to be sure for your specific case.
What happens to these contributions by the participant and the employer if the participant does not die before beginning to receive retirement benefits from the pension plan?
In such an event, the contributions from the participant and employer, and any interest earned thereon, are paid out over time as a part of the regular pension payments. In the event that the participant dies after beginning to receive retirement benefits but before all contributions are paid out, the contributions will be used to fund part of the post-retirement survivor annuity. If no one is designated to receive a post-retirement survivor annuity, the contributions will be paid out in lump sum to the designated beneficiary.
What’s the difference between a “former spouse” and “alternate payee”?
These are both terms of art that tend to be used loosely. However, they both mean the former spouse of a pension plan participant who is entitled to receive a share of the participant’s interest in the pension plan. The reason for the two terms is that “alternate payee” is preferred for plans that are governed by the Employee Retirement Income Security Act (ERISA), as amended and “former spouse” if preferred for plans that are not governed by ERISA.
Disclaimer: Each pension plan is different and may accumulate the pre-retirement lump sum benefit differently or may treat its division differently in a divorce. It is important to research the pension plan in your case to make sure that 1) the pre-retirement lump sum benefit exists as a benefit option; 2) that the pre-retirement lump sum benefit can be divided in a divorce; and 3) what language the plan needs to properly make the division, if allowed. The information provided here is based on Markham Law Firm’s experience in dealing with pension plans and the majority of plans encountered. If you have a pension in your case and you want help to determine the benefits available and division types allowed by the plan, give us a call at 240-396-4373 or email us at: qdro@markhamlegal.com.
In addition, each state has its own laws regarding the division of property. It is important to consult with an attorney licensed in your state regarding the division of property and how pensions and their benefits are treated in your state.
