In order to fairly apportion retirement plan assets/accounts that have been accumulated during a marriage, a divorcing couple and their advisors must understand the two varieties of retirement plans:
1. Defined contribution plans create individual accounts for the participants, or...
2. Defined benefit plans offer retirement benefits for the participants (sometimes shown as individual accounts in defined benefit plans, aka cash balance plans).
In this article, I'll focus on the top issue which faces a fair apportioning of retirement benefits accrued in a non-cash balance defined benefit plan. Benefits payable from a defined benefit plan are calculated via a specific formula. That specific formula, in most cases, will combine the participant's income, the participant's plan service credits, a rate of benefit credit per each year of service credit, and the age at which the benefit is expected to begin.
For example, the plan formula for benefit calculation might be 1.5% of final average pay (the average of the highest 5 years in the last ten years of service) times the number of years of service credits, payable monthly from age 65. So, a participant with twenty years of service at 65 will have earned a monthly retirement benefit equal to 30% of final average annual pay divided by 12.
Therefore, the issue to be deliberated is:
Do we divide the retirement benefit earned as of the date of the complaint, or do we divide the retirement benefit earned (or projected to be earned) at 65, prorated for the relationship between the years of service credits during the marriage and the years of service credits earned (or projected to be earned) at 65?
It's not unusual to find that benefit projections properly prorated will result in a larger share for the non-participant spouse.
For example,
- Retirement Benefit earned at date of complaint = $1,000 per month
- Retirement Benefit projected at 65 = $3,000 per month
- Years of service credits earned during the marriage = 10
- Years of service credits projected at 65 = 20
- Retirement benefit to be divided (non-projected) = $1,000 per month
- Retirement Benefit to be divided (projected) = $1,500 per month
($3,000 times 10/20)
When a marital estate includes one or more retirement plans, the issues needing deliberation are manifold. With proper guidance, each deliberation will result in a proper division of retirement plan assets.
1. Defined contribution plans create individual accounts for the participants, or...
2. Defined benefit plans offer retirement benefits for the participants (sometimes shown as individual accounts in defined benefit plans, aka cash balance plans).
In this article, I'll focus on the top issue which faces a fair apportioning of retirement benefits accrued in a non-cash balance defined benefit plan. Benefits payable from a defined benefit plan are calculated via a specific formula. That specific formula, in most cases, will combine the participant's income, the participant's plan service credits, a rate of benefit credit per each year of service credit, and the age at which the benefit is expected to begin.
For example, the plan formula for benefit calculation might be 1.5% of final average pay (the average of the highest 5 years in the last ten years of service) times the number of years of service credits, payable monthly from age 65. So, a participant with twenty years of service at 65 will have earned a monthly retirement benefit equal to 30% of final average annual pay divided by 12.
Therefore, the issue to be deliberated is:
Do we divide the retirement benefit earned as of the date of the complaint, or do we divide the retirement benefit earned (or projected to be earned) at 65, prorated for the relationship between the years of service credits during the marriage and the years of service credits earned (or projected to be earned) at 65?
It's not unusual to find that benefit projections properly prorated will result in a larger share for the non-participant spouse.
For example,
- Retirement Benefit earned at date of complaint = $1,000 per month
- Retirement Benefit projected at 65 = $3,000 per month
- Years of service credits earned during the marriage = 10
- Years of service credits projected at 65 = 20
- Retirement benefit to be divided (non-projected) = $1,000 per month
- Retirement Benefit to be divided (projected) = $1,500 per month
($3,000 times 10/20)
When a marital estate includes one or more retirement plans, the issues needing deliberation are manifold. With proper guidance, each deliberation will result in a proper division of retirement plan assets.
About the Author:
Howard
Phillips is a pension actuary, and has helped organizations and their workers
with the creation, implementation and administration of their tax-qualified
retirement plans.Over his forty year career, Mr.
Phillips was President of Consulting Actuaries Incorporated and President and
Director of The American Society of Pension Professionals and Actuaries.DIVIDING RETIREMENT PLAN ASSETS IN A DIVORCE is his
debut book release.
Phillips is a pension actuary, and has helped organizations and their workers
with the creation, implementation and administration of their tax-qualified
retirement plans.Over his forty year career, Mr.
Phillips was President of Consulting Actuaries Incorporated and President and
Director of The American Society of Pension Professionals and Actuaries.DIVIDING RETIREMENT PLAN ASSETS IN A DIVORCE is his
debut book release.
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