Reciprocal Pension Awards
When both parties in a divorce have a pension that was earned during the marriage, it sounds like a great idea to say to your client that the goal of any final agreement would be for each party to receive a reciprocal award from the other’s pension. To quote Captain Jack Sparrow from Pirates of the Caribbean, that’s “a fine goal, to be sure.” But as we all know, the devil is in the details.
If the parties have an interest in the same pension plan, then the goal is easy to accomplish. By having the same pension interest on both sides, the same rules for division of that interest will apply. Therefore, even if the plan has a unique or difficult to handle rule, it will apply to both parties.
If, however, the parties have an interest in different plans, they are likely dealing with different rules, and it may be that an exact, reciprocal award is not possible. Alternatively, it may simply take some creative solutions to get to a reciprocal award, or as close as possible thereto.
Major Considerations that may thwart a reciprocal pension award:
Being Divisible by QDRO. If one party’s pension is not divisible by QDRO, EDRO, COAP, or any other court order any agreement will require a consideration of tax payments. This necessity is because when a party is paid their share of a pension for property division purposes through a QDRO (or similar order) the recipient will pay income tax on those funds when received. However, when the pension is not divisible by QDRO (or similar order) only the participant is being taxed, so the parties must figure out by how much the other spouse’s share will be reduced to account for taxes, and if (and how) the parties will reconcile such reduction.
Amount of Annuity Payable to the Former Spouse. Some pensions have restrictions on how much of the participant’s’ pension can be awarded to a former spouse. If a limit is placed on one party, how will that impact the award to the other party? Will the reciprocal awards simply be similarly reduced, or will there be a direct payment from one party to the other to make up for the limitation on payment from the plan?
Amount of Survivor Benefit Payable. Some plans have set amounts of a survivor benefit that can be paid; other plans allow the survivor benefit to be divided into any size slice. It is important here to ensure the amount of survivor benefit agreed upon is available in both plans.
Cost of the Survivor Benefit. Most plans require the pension during the participant’s lifetime (while in pay status) to be reduced to provide funds for the survivor benefit. Some plans allow for this cost to be shifted easily between the parties through the Court Order. Others only allow for this reduction to be handled in a certain way.
Shared or Separate Interest Division. If the parties agree to divide the pensions as a separate interest, and later find out only one can be divided in such a manner, it can bring all of the above listed issues back on the negotiating table in order to figure out how to reach a new reciprocal award.
Valuation Date. Some pension plans will allow (or require) the former spouse’s share to be determined as of the date of divorce or some date other than the date the participant commences benefits. By selecting a date prior to the benefit commencement date, the parties are in essence saying that the former spouse’s benefit is not going to increase or be impacted by any post-divorce salary increases earned by the participant. The parties may agree to this, but whether it can be (or is required to be) implemented by the plan is an important question.
While the above is a long list of issues that can arise, they can all be alleviated by requesting the plan documents early in the case to investigate and understand the plans in your case. Alternatively if reviewing plan documents is not something you want to or are comfortable doing, retaining an attorney with experience dealing with retirement plans and their division is another great option. In addition, attorneys specializing in this area may already be familiar with the plans in your case, which can alleviate the need to request information from the other party (which is an especially good benefit when the other party is not cooperative).
Markham Law Firm has attorneys specializing in the preparation of QDROs (and similar orders) and the division of retirement assets. If you need assistance, please call out office at 240.396.4373 or email qdro@markhamlegal.com to see how we can help.
