Making Decisions About Dividing Defined Benefit Plans

There are many kinds of defined benefit plans, and the options for dividing the benefit pursuant to a divorce are many, and can be complicated.

Obtaining documentation from the Plan, including their Summary Plan Description, Benefit Options, and QDRO instructions and guidelines, is necessary to make sure you are making the best decisions.

There are two basic types of division of a defined benefit plan:  shared benefit, and separate interest.

A Shared Benefit division is one in which the benefit that the Participant receives upon retirement is shared with the Alternate Payee.  If the Alternate Payee dies after starting benefit, normally their portion of the benefit will revert to the Participant.   If the Participant dies after starting their benefit,  the Alternate Payee’s benefit under the QDRO will stop.  However, there are protections that can often be put into place to minimize or eliminate this problem, including a post retirement survivor annuity.  Be aware that not all Plans offer post retirement survivor annuities that can be built into the QDRO (PERA is a good example).

A Separate Interest division is where the Plan takes the benefit earned and divides it between the parties so that they each, in effect, have their own plan.  This eliminates the problem of the Alternate Payee’s benefit stopping on the death of the Participant.  It also has the benefit of the Alternate Payee being able to chose when to start taking benefit (which can be before, and sometimes after, the normal retirement age of the Participant). Under separate interest, the benefit that the Alternate Payee receives will be based on when they start taking the benefit and their age (rather than the age of the Participant).

How should the benefit be divided?
In Colorado, as in many states, benefit earned during the marriage is considered marital property.  Benefit earned before the marriage, or after the marriage has ended is considered non marital property.  There are a couple ways to deal with this when instruction a Plan on how to divide the benefit.

Coverture Fraction.  The default way in Colorado (often referred to as the Hunt Formula) is the coverture fraction, which takes into account that the benefit the Plan Participant will receive often benefit increases disproportionately in the last few years of their employment, but a result of all the time and contributions that they put into the Plan throughout their employment, including the time they were married.

The Coverture Fraction is

(the number of months in the Plan during the Marriagedivided by
the number of months in the Plan at the time of retirement)
the benefit received at the time of retirement.

For example, if someone was married for 120 months of the 240 months they were in the Plan at the time of retirement, the coverture fraction would be 120/360 or 30%.  So, 33.3% of the benefit at the time of the marriage would be considered marital property.

Once the marital portion has been determined, then how this marital portion will be divided between the parties needs to be determined.  This is often (but not necessarily in Colorado) 50%.

So, in our example, if the benefit at retirement is $5000 per month, the Alternate Payee would be awarded 50% of 33.3% of $5000, or 16.67% of $5000, or $833.33 per month.

Date of Divorce Method

The other common way to determine the marital fraction is similar to the coverture fraction, but to use the date of divorce for both the number of months in the denominator and also the value of the benefit that would have been received if the Participant has stopped working on the date of divorce.

(the number of months in the Plan during the Marriage
divided by
the number of months in the Plan at the time of divorce)
the benefit earned at the time of divorce.

So, in this case, if the Participant had contributed to the Plan for 120 months, all during the marriage, the fraction would be 120/120 = 100%.  If the benefit earned at the time of the divorce is, say, $1350 per month payable at retirement, then the Alternate Payee’s portion of that, if dividing it 50/50, would be $1350 x 50% or $675/month.

In neither case will you know for certain at the time of divorce what the benefit will be at the time of retirement.  Often you can get an estimate of benefit that the Participant has earned at the time of divorce (if they had stopped working then)  that would be payable at the normal time of retirement,  But it is only an estimate.   The Plan will determine at the time of retirement exactly what the benefit will be based on the instructions they have been given in the QDRO.

Other issues to take into account:

1.  If there is a cost of living adjustment payable on the benefit, should the Alternate Payee receive this?

2.  If there are early retirement bonuses or other enhancements to the pension benefit, should the Alternate Payee receive a pro rata share of these?

3.  Should the Alternate Payee be protected by pre retirement survivor annuity should the Participant die before retirement?

4.  Should the Alternate Payee be protected by a post retirement survivor annuity if the Participant should predecease the Alternate Payee after retirement in a share benefit plan?

The default answer to these questions is Yes, but circumstances may require a different answer.

Again, each plan is different, so getting the information about the Plan and its options as early as possible is best.