Settlement Agreement Language

In divorce, pensions as marital assets can be undeniably the most controversial issue, second only to child custody or maintenance. With pensions typically being the largest asset of the marital estate, marital settlement language as it relates to pensions can be extremely important.

Pensions & Marital Settlement Agreements

In most cases, a Qualified Domestic Relations Order (QDRO) is drafted after the divorce, generally without considering what exactly will be divided. All too often, the Marital Settlement Agreement (MSA) has only one statement about pensions: the pension will be split 50-50.

What is a QDRO?

A QDRO is a court order dividing retirement benefits of your pension plan and awarding a portion to a non-participant (your spouse, child, or other dependent). QDROs are limited to private non-governmental plans since governmental plans are exempt from QDRO provisions.

Although some governmental plans may accept the title QDRO, the same rights and provisions cannot be secured for the Alternate Payee in a government court order. An Alternate Payee is typically the ex-spouse of the pension plan participant.

Should the settlement agreement fail to address the following:

• How the pension will be divided

• If the QDRO is drafted without awarding gains, interest, or earnings 401(k)s

• Whether cost-of-living-adjustments should be taken into consideration pensions

You will undoubtedly put your client’s position at risk as it leaves the spouse’s share uncertain, which may be to the disadvantage or advantage of either party.

Types of Pensions

Defined Contribution Plan

A Defined Contribution Plan is defined by the account balance, such as 401(k) savings plans, profit-sharing plans, or ESOPs. This excludes governmental plans, which sometimes have what appears to be an account balance associated with them. Still, government pension plans only reveal employee contributions, which is not the value.

Defined Contribution Plans are seemingly the easier plans to deal with in terms of offsetting the value against other marital assets or dividing the account balance through a QDRO. However, issues related to these types of plans still need to be addressed in the settlement agreement, e.g., who determines the marital portion.

Defined Benefit Plan

A Defined Benefit Plan is the one most often misunderstood. It is a pension that has no account balance. Instead, it pays a specific monthly retirement benefit at a certain retirement age, most often based on years of service and salary. Dividing a monthly benefit instead of an account balance requires a distinctly different QDROs and settlement language.

One common issue arises in Defined Benefit Plans when an attorney representing an Alternate Payee fails to consider what happens if the plan participant dies unexpectedly and their spouse is not named as a survivor or beneficiary of their pension. In such cases, the spouse may not be eligible to claim the pension benefits, which can lead to complications.

When the distribution policy of a retirement plan is not what the spouse expected, Marital Settlement Agreements can also be very problematic if the pension plan won't distribute to the non-participant spouse until sometime in the future. Often, the plan will specify a certain age, such as 50 or 55, as the earliest age at which a distribution can be made.

In another example, 401(k) and similar plans, which may or may not be divided as of a specific date, may only make distributions once per year or semi-annually. Because of this, the settlement agreement language should not specify a date or an age at which distribution should be made. They also should not make the payment of marital debt contingent upon an assumed immediate distribution.

If you need help understanding what may be involved with the disbursement of a retirement plan under a QDRO, WFA Econometric Group can help.

Clarify When the Distribution of Retirement Plans will be Awarded

In another example, an Employee Stock Ownership Plan (ESOP)  or a profit-sharing plan will have an account balance, which may or may not be divided as of a specific date, usually only on the plan's valuation dates. Because of this, the settlement agreement language should specify that the account balance should be divided on the date of divorce or, if not allowed by the plan, the closest valuation date of the plan.

If you need help understanding what may be involved with your pension’s disbursement in an MSA, WFA Econometrics can guide you.

Military or Federal Government Retirement Plans

Regarding Military or Federal Government retirement plans, few attorneys and even financial professionals understand the complexity of dividing the plans by a court order.

Both types of plans will only allow the non-participant to receive their portion once the participant's spouse does. Problems also arise when the non-participant spouse isn’t named as the beneficiary or surviving spouse, when the court order dividing the retirement benefit says otherwise, e.g., remarriage before age 55 forfeits or suspends survivor benefits.

Naming the Surviving Spouse

The Military will only allow one spouse to be named as a survivor, unlike many traditional private pension plans, which allow more than one spouse to be deemed a survivor to proportionate shares of a pension.

The settlement agreement in a Military Order should clearly state whether the non-member former spouse is entitled to receive a survivor benefit (annuity) under SBP besides a portion of the core retired pay.

Lastly, many of the municipal plans cannot be divided. We can help you carefully check the details of your client’s (or their spouse’s) retirement plan to ensure that expectations are met, or the options are understood.