QDRO Preparation | QDRO Distribution | IRA Rollover Options | Security Analysis | Economic Analysis

Represent a Plan Participant

Represent a Plan Participant with a Federal or Military Pension?


Timothy C. Voit, Financial Analyst

Following is few pointers on what the attorney should be aware of if representing a plan participant in CSRS, FERS, Military, or any other similar plan, e.g. state department, municipal pensions, etc. First and foremost, the employing entities will typically not determine accrued benefits as of a specified date, for instance computing a monthly pension benefit as of the parties' date of filing or date of divorce. What they will typically provide are "projected" benefits, projected to retirement using certain assumptions and used for retirement planning purposes. Of course the opposing counsel, and the former spouse of the plan participant, will undoubtedly want to use these figures, however in most states, and most countries with defined domestic relations or equitable distribution laws, they tend to avoid awarding any portion of benefit accruing after a marriage, therefore, stay clear of projected benefits (statements like assuming continuous employment up to retirement your benefit would be "x"$per month). The exception, in court ordered divisions are states like California, Illinois, New York, to name a few, which allow for a benefit at retirement to be pro-rated.

To obtain an estate of an accrued monthly benefit, you either have to request a calculation of the accrued benefit, providing the plan person with the valuation date (e.g. date of divorce), and ask that they compute a monthly benefit based only on the years of service up to the valuation date and using only the earnings at the time. Some will and some won't provide this information. If not, you will have to obtain the plan formula for computing benefits, which is fairly straightforward and easy, and input the parameters yourself, or find a competent expert. You can either use this information to value the pension, for purposes of offsetting the value, or the other spouse's one-half share, against other marital assets, or award one-half (or a different agreed upon amount), from the pension in a court order. The difference can mean tens of thousands of dollars to the plan participant spouse.
If the pension value is to be offset, consider discounting the value for taxes since the plan participant is presumably taxed on every monthly payment from the pension. Typically, the amount of the tax discount is based on the effective tax rate of the individual and not marginal tax rates or tax brackets. Generally, the average effective tax rate for middle income Americans is 20%, which is why the IRS requires a cross the board withholding of 20% on any lump-sum distribution from a plan. It isn't as though the basis for the use of 20% is because the IRS requires such a discount but what they based their research on, which leads to the average effective tax rate. The incentive, for those courts that do not believe in tax affecting a pension, is simply to look at the alternative. What incentive exist for a plan participant spouse to offset the value of a pension, without a tax discount, when the alternative is to divide it by a court order wherein the spouse's share would be subject to taxes. None, so naturally the plan participant spouse will opt to have the pension divided by a QDRO or like order if the court or the opposing attorney does not agree to discounting the pension value b a tax discount.

Survivor benefits are another issue. Although the non-participant spouse, their attorney, or the court may feel that the former spouse is entitled to survivor benefits, what they might not realize is that there is a cost to providing survivor benefits. Say for instance, the accrued monthly benefit is $1,000 per month, based on a life-only benefit provided by the plan or as a result of the plan formula. The benefit is reduced to say $900/month if a survivor benefit is to be provided upon the plan participant's death. Should the plan participant spouse pay for a benefit that will be paid to a former spouse after his or her death? A valid argument. A suggestion is, and this applies to court ordered division of benefits as opposed to property offsets, to have the former spouse's awarded share be subjected to the cost of the survivor benefit - in effect, she wants it she pays for it (or if he wants he pays for it-not to make general assumptions).

Also be leery of survivor benefits based on the marital portion compared to survivor benefits based on the former spouse's awarded share. Based on the marital portion means that the former spouse will receive a survivor benefit based on the plan participant's share, as well as their own awarded share. The plan participant could not then name their subsequent spouse as a survivor/beneficiary to their portion.
If a $1,000 per month is being divided between the parties, each then is awarded $500 per month. If the survivor benefit is 50% and based on the gross benefit ($1,000) plan participant dies, the survivor benefit is $500 per month. But wait! If the plan participant spouse's share is $500/month could he/she name whoever they want to their $500? If so, the survivor benefit "based" on each party's share is the $250/month.
COLAs, or cost-of-living-adjustments, are increases applied to the benefit of a retiree after retirement or during retirement - not to be confused with cost-of-living-adjustments applied to earnings leading up to retirement. These are a normal form of benefit, funded by the plan, therefore not much of argument exist for denying a former spouse COLAs on their share, if the pension is divided as a marital asset or property. What may be an issue of contention is awarding any form of subsidized benefits years after the divorce, but at the time the plan participant spouse retires. Subsidized benefits are increases over and above what actually accrued because a company, or employing agency in the case of the federal government, may want to encourage early retirement. The amount or difference between the benefit that they will pay, say $1000 per month, and what actually accrued based on years of service and average annual income, say $750 is the subsidized benefit, or in this case $250 per month from the monthly benefit. If the subsidized benefit is based on anything other than years of service, they should probably not be included in the court order dividing the benefit.

With regard to military retired pay, the same applies. To protect your client, award a dollar amount to the former spouse based on the benefit that actually accrued, most notably based on the rank or pay grade at the time of divorce and the member's years of service. Although or if the member has less than 20 years of service, benefits are not vested, but they are accruing.

Check back as this article is updated with more valuable information from time-to-time.

Tim Voit is a Financial Analyst and author of Retirement Plan Benefits & QDROs in Divorce. Tim Voit is founder of Voit Econometrics Group, Inc. which provides the legal community with pension valuations, business valuations, economic analysis, and QDROs. As an analyst, as well as being retained in malpractice cases, Tim Voit and his firm have aided attorneys and law firms in the drafting of Qualified Domestic Relations Orders (QDRO's) and other Orders relating to private, governmental, and Military plans. Questions, or general inquiries can be made by contacting Tim Voit at askvoit@vecon.com.

© Voit Econometrics Group, Inc.

All information © 2014-2017 Voit Econometrics Group, Inc. | Powered by: Synergy Web Design & Marketing