What Is a Pension?
A pension is a retirement benefit that usually pays monthly income after retirement. It is often based on a formula that considers years of service, age at retirement, compensation, and the rules of the pension plan.
Pensions are sometimes called defined benefit plans because the benefit is usually calculated by a formula rather than simply based on an individual account balance.
Each pension plan has its own rules for division in divorce.
- CalPERS
- CalSTRS
- union pensions
- government pensions
- private employer pensions
- military retirement benefits
- federal retirement benefits
- county or city retirement systems
Pensions Are Property in Divorce
A pension is a property interest. In a California divorce, the pension may be community property, separate property, or both.
The portion of a pension earned during marriage is generally community property. The portion earned before marriage or after separation may be separate property.
The fact that only one spouse is the employee, member, or participant does not necessarily mean the pension belongs entirely to that spouse. If pension benefits were earned during the marriage, the other spouse may have a community property interest.
Separate Property Interest in a Pension
A pension may also include separate property.
When a pension includes both community and separate components, the judgment or pension division order should identify how the community portion is being divided.
- pension service earned before marriage
- pension service earned after separation
- benefits connected to separate property employment periods
- certain separate contributions or credits
- separate property rights under the plan
Date of Marriage and Date of Separation
The date of marriage and date of separation are important in pension division.
These dates are often used to determine what portion of the pension was earned during marriage. Pension plans and court orders may need these dates to calculate the community property interest.
If the parties disagree about the date of separation, they may also disagree about the size of the community interest in the pension.
Service Credit
Service credit is a key concept in many pension plans.
Service credit generally refers to the amount of work or credited service used by the pension plan to calculate retirement benefits. Service earned during marriage may create a community property interest.
Some plans also allow service credit to be purchased. Purchased service credit can create additional issues, especially if it was purchased with community funds or during the marriage.
How Pensions Are Divided
Pensions may be divided in different ways.
The correct method depends on the pension plan, the divorce agreement, the value of the benefit, and whether the pension is already in pay status.
- dividing the community portion of the pension when benefits are paid
- awarding the non-employee spouse a percentage of the community portion
- awarding one spouse the pension and giving the other spouse other assets as an offset
- dividing the pension through a plan-specific domestic relations order
- reserving jurisdiction until the pension is payable or properly valued
Pension Division Orders
A divorce judgment may state that a pension is divided, but the pension plan may still require a separate order before it will divide or pay benefits.
For many private employer retirement plans, this order is called a Qualified Domestic Relations Order, or QDRO. Public pension systems may use different names or plan-specific domestic relations orders.
The pension division order must usually comply with the rules of the pension plan. If the order is incomplete or does not follow the plan's requirements, the plan may reject it.
A QDRO tells the retirement plan who receives benefits, what percentage or amount is assigned, and how the benefits should be paid. The spouse receiving a share of the pension is often called the alternate payee.
A general divorce judgment may not be enough by itself. The pension plan may require a QDRO or similar order before benefits can be divided.
Public Pension Plans
Public pension plans, such as CalPERS, CalSTRS, county retirement systems, city retirement systems, and other government plans, may have special rules.
These plans often have their own forms, model orders, joinder requirements, and procedures. A standard QDRO used for a private employer plan may not be appropriate for a public pension plan.
Because pension plan rules vary, the order should be prepared for the specific plan involved.
Some pension plans may need to be joined to the divorce case before the court can make effective orders dividing the pension.
Joinder means adding the pension plan as a party for the limited purpose of addressing the retirement benefits. This is common with some public pension plans.
If joinder is required and not completed, the pension division may be delayed or rejected.
Pensions Already in Pay Status
A pension in pay status means the employee spouse has already retired and is receiving monthly pension payments.
Dividing a pension that is already being paid may require immediate attention. The non-employee spouse may be entitled to a share of the payments, and the pension plan may need a court order before it can divide or redirect payments.
If the pension is already in pay status, the judgment should clearly address current payments, future payments, and any amounts owed for payments already received.
Pensions Not Yet in Pay Status
If the employee spouse has not retired yet, the pension may not be paying benefits. In that situation, the non-employee spouse's share may be paid later when the pension becomes payable.
The order should explain how the community portion will be calculated and what happens when the employee spouse retires, becomes eligible to retire, dies, or elects a particular benefit option.
Some pensions include cost-of-living adjustments, also called COLAs. If the pension is divided, the order should clarify whether the non-employee spouse receives a share of future COLAs or other increases connected to the community portion.
Some pensions include early retirement benefits, subsidies, or enhanced formulas. A pension division order should address whether the non-employee spouse shares in early retirement benefits or other enhancements connected to the community portion.
Disability retirement benefits can create additional issues. Some disability benefits may be treated differently than regular service retirement benefits, depending on the plan and the reason for the benefit.
Valuing a Pension
A pension may need to be valued if one spouse is keeping the pension and the other spouse is receiving an offset.
Unlike a 401(k), a pension may not have a simple current balance. The value may depend on assumptions about retirement age, life expectancy, interest rates, salary, service credit, and plan rules.
In some cases, an actuary or pension expert may be needed to value the pension.
Sometimes a judgment reserves jurisdiction over a pension. This means the court keeps authority to make future orders about the pension.
A reservation may be used when the pension cannot be divided immediately, the parties need more information, or a separate pension division order will be prepared later.
However, if a pension is known to exist, the judgment should still clearly address how it will be handled.
Pension Disclosures and Common Mistakes
Pensions should be included in financial disclosures. This may include listing the pension on the Schedule of Assets and Debts or Property Declaration and providing available plan information.
Failure to disclose a pension can create serious problems after judgment.
Pension division can affect retirement income for years, so the paperwork should be specific.
- pension statements
- member benefit statements
- plan summaries
- service credit records
- employment dates
- contribution records
- retirement estimates
- survivor benefit information
- prior pension division orders
- plan model order requirements
- assuming the pension belongs only to the employee spouse
- failing to list the pension in disclosures
- not identifying the correct pension plan
- using vague judgment language
- failing to prepare a QDRO or pension division order
- ignoring survivor benefits
- ignoring death benefits
- ignoring cost-of-living adjustments
- failing to address service credit earned before marriage or after separation
- failing to join a plan when required
- offsetting a pension without proper valuation
- waiting too long to divide the pension
- assuming the divorce judgment alone is enough for the plan