If there is insufficient cash for a total immediate offset, a partial offset method can be used. Here are more pension valuation strategy tips.
By Mark K. Altschuler, Actuary
There isn’t always a simple valuation answer for each divorce case, which is why many pension disputes are litigated in a state’s highest courts. The circumstances of each case must be carefully scrutinized to avoid mistakes. Here are some of the more difficult valuation strategies that can arise during a divorce.
Pension Valuation Strategy Tips
Depending on the characteristics and provisions in a particular pension plan, the employee and nonemployee spouse may be better off with either an immediate offset or deferred distribution approach. For example, if the nonemployee spouse needs upfront cash as part of their property distribution and there are no available early retirement enhancements or subsidies in the plan, then immediate offset is the best approach because the nonemployee spouse receives cash without losing early retirement enhancements with a deferred distribution. If there is insufficient cash for a total immediate offset, a partial offset method can be used that includes cash plus a QDRO, with the percentage award for the alternate payee reduced.
Weighing Immediate Offset Approach
If the pension plan allows the employee to delay retirement indefinitely, then an immediate offset approach may be better for the alternate payee. An alternative is to draft the QDRO-type order, removing the participant’s financial incentive to delay retirement by increasing the benefit to the alternate payee for each year the participant delays. The present value of the alternate payee’s benefit remains the same and the participant won’t profit by delaying.
With early retirement subsidies, the alternate payee’s counsel should negotiate to include a provision whereby the alternate payee receives a pro-rata share of that subsidy. If the jurisdiction’s case law allows the alternate payee to receive a share of the subsidy, it would be a mistake for counsel to fail to include this provision in the QDRO.
Alternate Payee’s Participation in the COLA in the QDRO
The same analysis applies to COLAs. If a jurisdiction allows the alternate payee’s participation in the COLA in the QDRO, then counsel should include such a provision in the QDRO. The COLA should be less objectionable because it’s an increase to the pension benefit that’s awarded to all employees based on an inflation index and doesn’t consider the employee work efforts after divorce.
This may not be the case with early retirement incentives or enhancements where the employee needs a threshold number of service years to earn an early retirement subsidy. Say the employee has worked 17 years through the date of separation and doesn’t earn the early retirement subsidy until he works three additional post-separation years. A reasonable compromise would be to prorate the early retirement subsidy so seventeen/twentieths of the benefit is community or marital property to divide between spouses. Often, it isn’t clear whether the subsidy was earned with marital or post-marital years of service.
If the company announces an early retirement subsidy in the year following divorce and the subsidy is awarded without regard to years of service, the employee spouse will argue the benefit didn’t exist at the time of the divorce and the nonemployee spouse shouldn’t receive any of that subsidy. The nonemployee spouse will argue the subsidy isn’t being granted because of any work effort by the employee during or after marriage, but that it’s an across-the-board increase in pension benefits. Since they are receiving a percentage of the pension benefits under the existing QDRO, they should receive the same percentage of the newly enhanced benefit.
The full, unabridged version of this article by Mark Altschuler appears in Valuing Specific Assets in Divorce, Aspen Publishers ©2007. Used with permission from the author.
Mark K. Altschuler, Actuary, is president of Pension Analysis Consultants, Inc., serving all 50 states from offices in Pennsylvania & Florida. He has performed over 25,000 pension valuations and QDROs, and is an affiliated member of the American Society of Pension Actuaries and Professionals (ASPPA).
Key tips for identifying various retirement plans in divorce cases.
Each situation is different, so run the numbers both ways before you advise the client.